How to Use Your TFSA to Earn $985 Per Year in Passive Income

Here’s how holding cheap TSX dividend stocks in a TFSA can help you earn close to $1,000 in annual passive income.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Canadian investors should consider holding undervalued dividend stocks in a TFSA (Tax-Free Savings Account) to benefit from a recurring dividend stream and long-term capital gains. Any returns generated in a TFSA are sheltered from Canada Revenue Agency taxes, making cheap dividend stocks the ideal investment option in 2024.

The TFSA contribution limit in 2024 has risen to $7,000, raising the maximum cumulative contribution room to $95,000. So, let’s see how you can allocate $7,000 in 2024 to earn $1,000 in passive income in the next 12 months. Here are two top TSX dividend stocks you can consider buying right now.

Softchoice stock

Softchoice (TSX:SFTC), valued at $1.1 billion by market cap, provides software and cloud-focused IT solutions. It offers artificial intelligence (AI)-powered cloud and digital workplace solutions supported by advanced software asset management capabilities. Softchoice creates value for customers by reducing IT spending, optimizing their technology, and supporting business-driven innovation.

Softchoice ended the first quarter (Q1) with a revenue retention rate of 98% due to a decline in hardware gross sales offset by higher customer retention and software and cloud gross sales.

It’s small and medium business and commercial revenue retention is above 100%, which was offset by a decline in hardware gross sales.

Softchoice signed a new strategic partnership framework agreement with Microsoft to further enhance its capabilities and capacity to develop, sell, and deliver the tech giant’s cloud and digital workplace AI and security solutions.

In Q1, Softchoice launched SAM+, a suite of software asset management solutions and services to efficiently manage the complexities of subscription-based licensing.

Softchoice increased adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) by 4.3% in Q1 to $15.1 million, despite a 19% fall in net sales as it focused on operating leverage and prudent cost management, which was offset by growth investments and the launch of an AI solutions team.

Softchoice raised its dividends by 18% to $0.13 per share, translating to a forward yield of 2.9%. In the last 12 months, Softchoice’s free cash flow stood at $48.8 million, while its dividend payouts were much lower at $26.5 million, indicating a payout ratio of just over 50%.

Priced at 17.3 times forward earnings, SFTC stock is quite cheap and trades at a discount of 12% to consensus price target estimates.

EQB stock

EQB (TSX: EQB) is an undervalued TSX bank stock positioned to generate significant wealth for shareholders in the upcoming decade. EQB pays shareholders an annual dividend of $1.80 per share, indicating a yield of 1.9%. Moreover, these payouts have risen by more than 15% annually in the past decade.

Despite a challenging macro environment, EQB increased adjusted net income by 13% year over year to $219.4 million in Q1, while its total assets under management rose 18% to $123.5 billion.

Priced at eight times forward earnings, EQB stock is really cheap and trades at a discount of 14% to consensus price target estimates.

The Foolish takeaway

COMPANYRECENT PRICENUMBER OF SHARESDIVIDEND PAYOUT(Quarterly)CAPITAL GAINSANNUAL RETURNS
Softchoice$18.20192$25$416$516
EQB$93.8137$16.8$385$469

An investment of $7,000 distributed equally in these two TSX stocks should help you earn around $184 in annual dividends. If we include potential capital gains, returns might be around $800, which means cumulative gains will be around $985 in the next 12 months.

Should you invest $1,000 in Capstone Copper right now?

Before you buy stock in Capstone Copper, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Capstone Copper wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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 EQB and Microsoft. The Motley Fool has a disclosure policy.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

Canadian Red maple leaves seamless wallpaper pattern
Dividend Stocks

5 Canadian Dividend Stocks to Buy and Hold for the Next 20 Years

These Canadian stocks have paid dividends for decades, making them reliable investments to generate regular passive income.

Read more »

Dividend Stocks

3 Canadian REIT Stocks to Buy and Hold for the Next Quarter-Century

These three Canadian REITs trade cheaply and are highly reliable, making them some of the best stocks you can buy…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »

rail train
Dividend Stocks

What to Know About Canadian Pacific Railway Stock for 2025

CP stock has now gone through a major merger, so what do investors have to look forward to?

Read more »

ways to boost income
Dividend Stocks

Top Canadian Value Stocks I’d Buy for Dividend Growth and Appreciation

If you are looking for income and capital appreciation, here are three Canadian value stocks for a great total return…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Canadian Stock to Buy With $2,000 Right Now

The company’s powerful combination of growth, income, and value, positions it well to deliver solid returns, making it a smart…

Read more »

Transparent umbrella under heavy rain against water drops splash background. Rainy weather concept.
Dividend Stocks

This 10.6 Percent Dividend Stock Pays Cash Every Single Month

Are you looking to invest for a rainy day? This 10.6% dividend stock pays cash every month, irrespective of the…

Read more »