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

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

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.