How to Use Your TFSA to Earn $34,150 Per Year in Tax-Free Income

Canadian investors can hold undervalued TSX dividend stocks in a TFSA and benefit from outsized gains 2024 and beyond.

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Canadians can leverage the benefits offered by the TFSA (Tax-Free Savings Account) to build long-term wealth. Any returns earned in this registered account are exempt from Canada Revenue Agency taxes, making it an ideal account to hold blue-chip dividend stocks. Generally, the best dividend stocks can help you earn a steady stream of dividend income and benefit from capital gains over time.

Launched in 2009, the TFSA has gained popularity among Canadians due to its tax-sheltered status. The maximum cumulative TFSA contribution in 2024 has increased to $95,000, which can be used to hold quality dividend stocks such as Brookfield Infrastructure Partners (TSX:BIP.UN). Let’s see why.

Is Brookfield Infrastructure Partners stock a good buy right now?

Valued at $17 billion by market cap, Brookfield Infrastructure is among the largest owners and operators of critical global infrastructure networks that facilitate the movement and storage of energy, freight, passengers, water, and data. It is one of the few pure-play infrastructure vehicles that invests in real assets with stable cash flows and high margins.

Despite a sluggish macro environment, BIP reported funds from operations (FFO) of US$615 million in the first quarter (Q1), an increase of 11% year over year. Its organic FFO grew by 7% while US$2 billion of new investments also drove cash flows higher for the company, partially offset by its recycling program and higher interest costs.

Brookfield emphasized organic growth in Q1 was supported by inflation indexation, strong transportation and the commissioning of more than $1 billion of new capital from its capital backlog.

The transportation segment was a key driver of FFO growth, which stood at US$302 million, up 57% year over year. BIP’s fund flows increased due to its acquisition of Triton, tariff increases, and higher volumes. Moreover, its rail networks and tool roads realized average rate increases of 9% and 7%, respectively.

Brookfield Infrastructure emphasized that market conditions continue to improve in 2024, as showcased by higher merger and acquisition activity levels. It has already secured US$1.2 billion in proceeds from the sale of legacy assets in Q1 and aims to end the year with a capital-recycling target of US$2 billion.

In April, Brookfield disclosed plans to sell the fibre platform part of its French Telecom infrastructure business to a financial buyer. The transaction should net around US$188 million to BIP, indicating an internal rate of return of 17%.

BIP’s steady and predictable cash flows allow it to pay shareholders an annual dividend of US$1.62 per share, indicating a yield of almost 6%. These payouts have almost tripled in the last 13 years.

The Foolish takeaway

COMPANYRECENT PRICENUMBER OF SHARESDIVIDEND (Quarterly)CAPITAL GAINS
TOTAL PAYOUT (Dividends+ Capital Gains
Brookfield Infrastructure$37.162,556$0.5525$28,500$34,148

An investment of $95,000 in BIP stock would help you buy 2,556 shares of the company. Given its dividend payout, you will earn roughly $5,650 via dividends in the next 12 months. Further, the stock trades at a discount of 30% to consensus price target estimates. So, your capital gains could amount to $28,500, bringing your total returns to over $34,100.

This is just an example that showcases the potential benefits of investing in quality dividend stocks. Investors must identify other such dividend-paying giants and hold them in a TFSA, which results in portfolio diversification and lower risk.

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 no position in any of the stocks mentioned. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.

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