The Tax-Free Savings Account (TFSA) is a registered account that can help you build significant wealth over time. Canadian residents over 18 can hold qualified investments such as bonds, stocks, mutual funds, and exchange-traded funds in this registered account and enjoy tax-free returns for life.
The TFSA’s tax-sheltered status makes it ideal for investors looking to hold dividend stocks and benefit from a steady stream of recurring income and long-term capital gains.
The TFSA contribution room has increased to $7,000 in 2024, bringing the cumulative contribution limit to $95,000. Let’s see how you can use the TFSA to earn $5,000 in tax-free income each year by investing in dividend stocks.
Enbridge stock
Enbridge (TSX: ENB) is a blue-chip energy infrastructure giant and one of the largest companies in Canada. It pays shareholders an annual dividend of $3.66 per share, translating to a forward yield of 6.9%.
Moreover, Enbridge has increased its dividend payments by 10% annually on average since 1995, which is exceptional for a company in the cyclical oil and gas sector. Enbridge’s diversified and expanding base of cash-generating assets allows it to generate stable cash flows across market cycles.
Last year, Enbridge agreed to acquire three regulated natural gas utilities from Dominion Energy for $19 billion. The addition of these three U.S.-based assets will increase the EBITDA (earnings before interest, tax, depreciation, and amortization) contribution from natural gas utilities to 20% from 12%, reducing the contributions from oil pipelines to 50% from 57%.
With a dividend-payout ratio of less than 70%, Enbridge still has the flexibility to reinvest in acquisitions, strengthen its balance sheet, and grow its dividend by 3% to 5% annually.
Brookfield Renewable Partners stock
Brookfield Renewable Partners (TSX: BEP.UN) is another popular TSX dividend stock with a forward yield of over 6%. The clean energy giant has increased its cash distributions by 6% annually since 2001, while its payout has increased by at least 5% annually since 2011.
Brookfield Renewable Partners generates durable cash flows allowing it to raise dividends each year. Around 90% of the power it generates is sold to utilities and large corporates under long-term contracts.
Additionally, these contracts are linked to inflation, which accounts for 70% of its sales. Brookfield Renewable expects inflation-linked rates to increase its funds from operations between 2% and 3% annually.
The company’s robust cash flow profile is complemented by a strong balance sheet. Armed with an investment-grade credit rating, most of Brookfield’s debt is tied to fixed interest rates. It ended the second quarter with US$4.4 billion in liquidity, allowing it to deploy capital toward growth projects and drive future cash flows higher.
Brookfield Renewable expects to generate US$1.3 billion by selling its legacy assets in 2024, which will be used to lower balance sheet debt and fund new investments.
Brookfield’s high dividend yield is powered by its enviable earnings growth. Since 2016, its funds from operations per share have grown by 12% annually. Moreover, it expects to grow earnings at a double-digit rate through 2028.
The Foolish takeaway
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Enbridge | $53.15 | 715 | $0.915 | $654 | Quarterly |
| Brookfield Renewable Partners | $31.81 | 1,226 | $0.49 | $600 | Quarterly |
Investing a total of $78,000 distributed equally in the two TSX dividend stocks should help investors earn $5,000 in annual dividends. If the payouts are increased by 7% annually, your dividends will double in the next 10 years.
Investing such a huge sum in just two companies is far from ideal, making it essential to identify other high-dividend stocks and further diversify your equity portfolio.
