How to Earn Big TFSA Income the Canada Revenue Agency Can’t Tax

Canadian stocks like Fortis Inc (TSX:FTS) can generate large amounts of passive income.

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Do you want to earn passive income that the Canada Revenue Agency (CRA) can’t tax? If so, it pays to invest in a Tax-Free Savings Account (TFSA). TFSAs shelter your investments from taxation, much like RRSPs do. However, unlike RRSPs, they do not become taxable on withdrawal. For this reason, they are among the best accounts to invest your money in. In this article, I will explore two stocks that could generate large amounts of passive income if held in a TFSA.

Invest in financials and utilities

A good way to get a lot of passive income in your TFSA is to invest in Canadian financials and utilities. Canadian financials (banks, insurance companies) are considered some of the best in the world. Canadian utilities are usually sensibly run as well. By investing in a combination of TSX financials and utilities, you can easily achieve a 5% portfolio yield.

First National Financial (TSX:FN) is a Canadian non-bank lender. It issues mortgages but does not take deposits. Instead, it raises money for its mortgages by issuing bonds. This means that, unlike a bank, First National does not face the risk of depositors fleeing. That is a significant advantage. Banks sometimes collapse when depositors take all of their money out in large numbers. Such a thing can’t happen to First National: the worst that could happen would be its bonds having to be re-financed at higher interest rates.

First National Financial is a high-yield stock that pays a $0.204167 dividend each month. That works out to approximately $2.45 per year. At today’s stock price of $36.06, the yield is approximately 6.8%.

Can First National financial keep paying its dividend? My feeling is that, yes, it can. Its dividend payout ratio is a fairly modest 61%, and its revenue and earnings grew at a rapid pace last quarter. Most likely, FN’s dividend will continue rising.

As for utilities, you could look into a company like Fortis Inc (TSX:FTS). Fortis is a Canadian utility whose shares yield 4.2%. It has increased its dividend every year for the last 50 years, making it a Dividend King. Fortis stock has many good characteristics. First, its dividend payout ratio is well under 100% – not all TSX utilities can boast that distinction. Second, it is geographically diversified, with assets spanning Canada, the U.S., and the Caribbean. Third and finally, FTS is seeing significant insider buying, with company executives having bought $1.9 million worth of stock in the last 12 months. On the whole, these shares are worth investing in.

How much can you keep free from taxation?

Having reviewed First National Financial and Fortis stock, we can now try to gauge how much tax-free passive income they can produce together. The maximum amount of TFSA contribution room a person can have in 2024 is $95,000, so let’s assume that half of that is invested in FN and the other half in FTS. That produces the amount of dividend income shown below:

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCY
First National$36.061,317$0.204167/month ($2.45/year).$268/month ($3,226/year).MONTHLY
Fortis$55.68853$0.59/quarter ($2.36/year).$503.27/quarter ($2,013/year).QUARTERLY
TOTALN/A
N/A

N/A
$5,239/year
N/A
FN and Fortis: dividend math.

As you can see, a fully maxed-out TFSA invested in Fortis and First National shares would pay about $5,239 per year if the dividends never changed, for a near-6% yield! Now, of course, you ought to have more than just two stocks in your portfolio: The Motley Fool’s stance is that a portfolio ought to have at least 25 stocks. I generally agree. However, the table above does show just how much passive income you can accumulate in a maxed-out TFSA. It’s quite a lot!

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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.

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