For any Canadian who wants to grow a significant portfolio and generate a passive income free of income tax, the Tax-Free Savings Account (TFSA) is one of the best tools available. With a TFSA, your investments can grow tax-free. It means any capital gains, interest, or dividends are never taxed when withdrawn from the account. In 2024, the annual contribution limit was increased by $7,000.
Combined with the contribution room made available since the account’s inception, Canadians who have been eligible to open one but never did can contribute up to $95,000 in a TFSA. You can use the tax-sheltered status of the account to achieve various long-term financial goals, whether you want to save for your retirement or fund a big-ticket purchase in a few years.
Due to tax-free withdrawals, the TFSA can also become an excellent passive-income stream. By building a solid portfolio of dividend stocks, you can turn your TFSA into a tax-free income stream. Today, I will discuss three stocks you can consider when beginning to build such a portfolio.
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TC Energy
TC Energy (TSX: TRP) is a $63.32 billion market capitalization energy company headquartered in Calgary that pays its investors dividends on a monthly schedule. The company develops, owns, and operates energy infrastructure throughout North America, transporting much of the hydrocarbons used and produced in the region.
Backed by solid cash flows and strong fundamentals, the company has grown its payouts to investors for the last 24 years, making it a Canadian Dividend Aristocrat. TRP also has capital programs in place to continue boosting cash flows that can, in turn, maintain steady dividend growth. As of this writing, it trades for $61.03 per share and boasts a 6.29% dividend yield.
MCAN Mortgage
MCAN Mortgage (TSX: MKP) is a $683.08 million market capitalization company based in Toronto. While one of the smaller players in the Canadian mortgage industry, even among non-bank lenders, it might be an excellent investment to consider. At the lower end of small-cap stocks, the company offers dividends on a monthly schedule with a juicy 8.72% dividend yield.
While mortgages are its core business, it has rebranded to MCAN Financial, expanding its business to offer assistance to investors with real estate investments. Under its MCAN Wealth segment, the company also offers Guaranteed Investment Certificates.
Its complementary revenue streams helped the company grow its net revenue by 20% between 2021 and 2023. As of this writing, the stock trades for $17.90 per share and seems too attractive to ignore for income and growth-seeking investors.
BCE
BCE (TSX: BCE) is a $43.54 billion market capitalization giant in the Canadian telecom space, and like its peers, it is a reliable source of income for dividend-seeking investors. Telecoms generate a reliable revenue stream, which, in this day and age, is becoming increasingly defensive. The company has a growing number of monthly subscriptions that provide stable cash flows.
Besides its telecom offerings, BCE operates a massive media segment that provides a complementary revenue stream to its core business. The company’s solid fundamentals let it invest in growth to maintain its leading position and pay some of the best dividends. As of this writing, BCE stock trades for $47.73 per share and pays its investors their dividends on a quarterly schedule at a juicy 8.36% dividend yield.
Foolish takeaway
Canadians have a wealth of avenues to explore for passive income, but dividend investing in a TFSA is one of the best options they can consider. By reinvesting dividends to unlock the power of compounding, you can accelerate the growth of your portfolio.
When the payouts become large enough, you can start withdrawing the dividends without incurring taxes to fund your expenses. To this end, these three TSX stocks can be excellent foundations for your TFSA portfolio.
