How to Use Your TFSA to Earn $2,560 Per Year in Passive Income

Hold quality dividend stocks such as WSP Global in a TFSA and benefit from outsized gains for life.

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Canadians should use the Tax-Free Savings Account, or TFSA, to hold quality growth stocks that also pay dividends. Historically, dividend stocks have showcased an ability to beat broader market returns, as investors benefit from a steady dividend payout as well as capital gains. Moreover, any returns generated in the registered account are sheltered from Canada Revenue Agency taxes.

The average TFSA balance at the end of 2023 was around $41,000. Now, investors should allocate around 80% of their equity investments toward diversified low-cost index funds, which lower investment risk, and the rest toward individual dividend stocks such as WSP Global (TSX:WSP). Let’s see why.

An overview of WSP Global

Valued at $27.4 billion by market cap, WSP Global is one of the largest professional services firms in the world. It provides strategic advisory, engineering, and design services to clients seeking sustainable solutions in sectors such as transportation, infrastructure, energy, water, and mining, among others.

In the last 10 years, WSP Global has returned close to 600% to shareholders after adjusting for dividends. Comparatively, the TSX index has returned “just” 103% to investors since July 2014.

A strong performance in Q1 of 2024

WSP Global reported net sales of $2.79 billion in the first quarter (Q1) of 2024, an increase of 4.7% year over year. It ended Q1 with a backlog of $14.2 billion, representing 11.8 months of sales, with the Americas segment recording organic backlog growth of 10.3% in the last four quarters.

An increase in productivity allowed WSP Global to report an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of 16%, up from 15.5% in the year-ago period. Its EBITDA in Q1 stood at $446.1 million, compared to $413 million last year.

WSP’s current projects include building an efficient stormwater drainage system in Jeddah, supporting a battery metals project toward pre-feasibility, and a regeneration project to create a town centre in Central London.

In addition to organic growth, WSP continues to target potentially accretive acquisitions to gain traction across business segments. It recently announced plans to acquire AKF Group, a New York-based mechanical, electrical, and plumbing firm that designs complex mission-critical facilities in verticals such as healthcare and science & technology.

AFK’s expertise will complement WSP’s property and building team, which should boost its capabilities and presence in several high-demand markets.

Is WSP Global stock undervalued?

Analysts tracking WSP Global expect adjusted earnings to expand from $6.9 per share in 2023 to $7.92 per share in 2024 and $9.05 per share in 2025. So, priced at 24 times forward earnings, WSP stock might seem expensive, but the company is forecast to grow earnings by more than 10% annually in the next five years.

An expanding earnings base should translate to consistent dividend hikes, significantly improving the effective yield. WSP Global pays shareholders a quarterly dividend of $0.375 per share, indicating a forward yield of 0.7%.

Analysts remain bullish on WSP stock and expect it to gain almost 10% in the next 12 months.

The Foolish takeaway

If you allocated $10,000 to WSP one year ago, you would have earned $12,560 in dividend-adjusted gains. Investors should identify other quality dividend stocks trading at a reasonable valuation to diversify their portfolios 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 WSP Global. The Motley Fool has a disclosure policy.

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