It is crucial for Canadians to maximize TFSA (Tax-Free Savings Account) contributions and benefit from the tax-sheltered status of this registered account. You can use the TFSA to hold income-generating products such as dividend stocks and Guaranteed Investment Certificates, or GICs.
The interest rate hikes in the past two years have made GICs extremely popular, where you invest a certain sum for a fixed term and earn an interest rate of 5% annually. However, holding dividend stocks can help you earn a steady stream of recurring dividend income as well as long-term capital gains, both of which are exempt from taxes if held in a TFSA.
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How much do you need to invest to earn $600 per month
A company’s dividend yield is inversely proportional to its stock price. So, when the stock price falls, its dividend yield rises, and vice versa. The ongoing bull run is primarily driven by companies in the tech sector, which suggests there are several stocks across sectors trading at a discount to historical prices.
A monthly dividend payout of $600 translates to an annual income of $7,200. Given an average dividend yield of 7.2%, you would need to invest at least $100,000 in stocks. In 2024, the maximum TFSA contribution room is $95,000, which suggests that the passive-income target of $600 per month is out of reach for most investors today.
However, you can reach the $7,200 per year (or $600 per month) target over time by investing in dividend-growth stocks such as Enbridge (TSX:ENB).
Enbridge stock is a dividend giant
Enbridge is a diversified energy infrastructure giant that owns and operates a wide portfolio of cash-generating assets. While Enbridge is part of a cyclical sector, a majority of its cash flows are regulated or tied to inflation-linked, long-term contracts. This earnings visibility has allowed Enbridge to raise its dividends by 10% annually since 1995.
Its acquisition of three natural gas utilities from Dominion Energy will be completed by the end of 2024, driving future cash flows and dividends higher.
Armed with an investment-grade balance sheet, Enbridge’s dividend is backed by solid financials as it has a distributable cash flow payout ratio of less than 70%. A sustainable payout ratio provides Enbridge the room to lower balance sheet debt, target acquisitions, and raise dividends further.
While Enbridge stock trades 23% below all-time highs, it has created massive wealth for shareholders. In the last 20 years, Enbridge has returned close to 900% if we adjust for dividend reinvestments. If we expand the investment horizon to 30 years, cumulative returns for ENB stock are much higher at 4,940%.
The Foolish takeaway
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Enbridge | $50.54 | 1,093 | $0.915 | $1,000 | Quarterly |
Given Enbridge’s annual dividend of $3.66 per share, you will have to buy 1,093 shares worth $55,207 today, which will help you earn $4,000 in annual dividends. In case Enbridge increases its dividends by 7.6% each year, your annual dividend income should touch $7,200 after eight years.
This is just an example of how you can use the TFSA to create a steady stream of tax-free passive income. Canadian investors should aim to diversify their portfolio and hold a basket of high-dividend stocks across sectors to lower overall portfolio risk.
