Canadian investors should look to leverage the benefits offered by registered accounts such as the TFSA (Tax-Free Savings Account). Introduced in 2009, the TFSA provides investors with a chance to generate tax-free returns for life on investments such as stocks, bonds, mutual funds, and exchange-traded funds. The TFSA contribution room for 2024 has increased to $7,000, raising the maximum cumulative contribution limit to $95,000.
Canadian investors can consider holding shares of fundamentally strong dividend-growth companies in the TFSA to benefit from recurring dividend income and long-term capital gains. One such TSX dividend stock is Exchange Income (TSX:EIF), which pays a monthly dividend while offering you a forward dividend yield of 5.7%, given its annual payout of $2.64 per share.
The bull case for EIF stock
Valued at a market cap of $2.2 billion, Exchange Income is a diversified, acquisition-oriented company focused on opportunities in verticals such as aerospace & aviation and manufacturing. The TSX stock went public in 2004 and has since returned 19% annually to shareholders, outpacing the TSX index by three times. In fact, since its initial public offering, EIF has been among the top 10 performing stocks on the TSX exchange.
Despite an uncertain and challenging macro environment, EIF grew sales by 21% year over year to $2.5 billion, while adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) rose by 22% to $556 million. Net earnings grew by 12% to $144 million, and free cash flow stood at $202 million, which was up 15% from the year-ago period.
In the last 12 months, EIF paid shareholders close to $115 million in total dividends, indicating a payout ratio of less than 60%. This provides Exchange Income with the flexibility to target acquisitions and lower balance sheet debt, both of which should drive future cash flows higher.
In addition to its acquisition strategy, EIF embarked on multiple growth initiatives in 2023 through capital deployment in existing subsidiaries. In 2023, it announced significant contractual wins, including new medevac contracts in British Columbia and Manitoba. Moreover, EIF acquired aircraft required to support certain domestic Air Canada routes on the East Coast.
The deployment of growth capital is in line with its business model to maximize the profitability of existing portfolio companies. The company explained that unlike acquisitions, which are immediately accretive, growth capital expenditures require time for the company to reap rewards in terms of earnings and cash flow.
The Foolish takeaway
A conservative approach to balance sheet management and the strength of its diversified portfolio of subsidiary companies allowed EIF to raise monthly dividends 17 times since 2004. To date, it has distributed $870 million in cash dividends to shareholders.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Exchange Income | $46.38 | 151 | $0.22 | $33.22 | Monthly |
An investment of $7,000 in EIF stock will help you buy 151 shares of the company and help you earn a monthly dividend of $33.22, indicating an annual payout of almost $400. If the company raises dividends by 7% annually, your payout will double in the next decade, raising the yield at cost to more than 11%.
Priced at less than one time forward sales and 14 times forward earnings, EIF stock is really cheap and trades at a discount of 39% to consensus price target estimates.
