TFSA Pension: How to Earn $2,000 a Year in Tax-Free Income

The TFSA can be used to hold blue-chip dividend stocks such as Fortis and Enbridge to earn passive income for life.

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The Tax-Free Savings Account (TFSA) is a popular registered account among Canadians due to its flexibility. Moreover, the contribution limit for the TFSA increases each year, typically in line with inflation. In 2024, the Canada Revenue Agency (CRA) raised the TFSA contribution limit to $7,000, bringing the maximum cumulative contribution room to $95,000.

The TFSA can hold a variety of qualified investments, including stocks, bonds, and mutual funds. Due to its tax-sheltered status, it makes sense to create a portfolio of blue-chip dividend stocks and hold them in a TFSA, as investors will benefit from a regular stream of dividend income and long-term capital gains.

According to a Bank of Montreal report, the average TFSA balance in 2024 is just over $40,000. So, it means you need to buy TSX dividend stocks with an average yield of 5% to earn $2,000 a year in tax-free income, given an investment of $40,000. Here are two stocks you can consider buying and earn $2,000 a year in tax-free income.

Fortis stock

Valued at $26 billion by market cap, Fortis (TSX:FTS) operates as an electric gas and utility company. It generates, transmits, and distributes electricity to 550,000 retail customers in Arizona with an aggregate capacity of 3,408 megawatts, including 68 megawatts of solar capacity and 250 megawatts of wind capacity.

It owns gas-fired and hydroelectric generating capacity totalling 65 megawatts and distributes natural gas to over one million residential, commercial, and industrial customers in British Columbia. Fortis operates an electricity distribution system that serves 592,000 customers and owns hydroelectric generating facilities with a combined capacity of 225 megawatts.

Fortis pays shareholders an annual dividend of $2.36 per share, translating to a forward yield of 4.3%. Part of a recession-resistant sector, Fortis has raised dividends for 50 consecutive years, the second-largest streak for a Canadian company.

The growth story for Fortis is far from over, as it has allocated $4.8 billion towards capital expenditures in 2024, which should drive future cash flows higher. The company emphasized its five-year capital plan of $25 billion is on track. Moreover, it has allocated $7 billion for cleaner energy investments as Fortis aims to interconnect renewables to the grid and invest in clean energy generation and storage.

Enbridge stock

A popular TSX energy stock is Enbridge (TSX:ENB), which currently offers a tasty yield of 7.4%. While Enbridge is part of a cyclical sector, its diversified base of cash-generating assets has allowed it to raise dividends by 10% annually since 1995, showcasing the resiliency of its cash flows.

Enbridge emphasized that most of its cash flows are tied to long-term inflation-linked contracts, making it immune to fluctuations in commodity prices.

Priced at less than 18 times forward earnings, ENB stock is not too expensive, given that it increased adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) by 11% year over year to $5 billion in the first quarter of 2024.

The Foolish takeaway

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCY
Fortis$54.43321$0.59$189.39Quarterly
Enbridge$49.57353$0.915$323Quarterly

For you to earn just over $2,000 in annual tax-free income you should invest a total of $35,000 distributed equally in these two stocks. If Fortis and Enbridge raise dividends by 7% annually, your dividend payout will double in the next decade.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has positions in Enbridge and Fortis. The Motley Fool recommends Enbridge and Fortis. The Motley Fool has a disclosure policy.

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