Are you interested in earning passive income in a Tax-Free Savings Account (TFSA)?
In a way it’s a silly question — who wouldn’t want tax-free income? — but the truth is that most Canadians lack clear plans to turn their TFSAs into real income powerhouses.
Anybody can open a TFSA, but you need to buy good assets within your TFSA in order to realize good returns in it. Dividend stocks can be great choices. Such stocks provide regular income, and because their dividends would otherwise be taxed, they benefit from being held in a TFSA. In this article, I will explore three stocks that I am buying in my TFSA in 2024.
TD Bank
Toronto-Dominion Bank (TSX: TD) is a Canadian bank stock that I hold in both my TFSA and my Registered Retirement Savings Plan. I held it for years before selling out of it at $82. Later, I started buying it back in the $70-$80 range. I managed to bottom-tick it at $74 at one point, although I didn’t get all my shares that cheap.
Why do I like TD Bank stock? There are several reasons.
First, it is among the cheapest Canadian bank stocks if you go off of last year’s earnings rather than this year’s earnings. The company’s money-laundering investigation caused it to book a few billion for potential lawsuits this year, which caused last quarter’s earnings to be negative. Despite this, the stock trades at low multiples to sales and book value compared to other Canadian banks. Also, management expects the money-laundering investigation to be over and all fines to be paid by the end of this year. So, there’s a good chance of a recovery in 2025.
TD Bank pays a $1.02 quarterly dividend. That works out to $4.08 per year. At today’s stock price of $85.44, the yield is 4.8%. Overall, it’s a decent TSX dividend stock to look into.
Taiwan Semiconductor
Taiwan Semiconductor Manufacturing (NYSE: TSM) is (surprise, surprise) a Taiwanese semiconductor manufacturing company. It manufactures computer chips designed mainly by the big U.S. tech companies. It manufactures 60% of the world’s computer chips and 90% of the most advanced chips, such as the graphics processing units (GPUs) that power artificial intelligence (AI) applications like ChatGPT.
There are several companies that manufacture computer chips, but none of the others are even close to TSMC’s scale. While Intel and Samsung can fulfill some client orders, the large number of chips that large customers like Apple and NVIDIA require simply take a lot of plant capacity, which TSMC has in spades. Its competitors don’t have as much. Furthermore, competing with TSM effectively would require massive investments in ASML lithography machines, which cost $400 million each! So, TSM enjoys an economic moat due to the extreme expense it would take to compete with it.
Oaktree Specialty Lending
Oaktree Specialty Lending (NASDAQ: OCSL) is perhaps the one stock on this list that I am the least certain about. I’m currently down on the position by about 20%; however, the stock pays a gigantic 13% yield. So, if the dividend keeps being paid and the position does not decline in value any further, I’ll still make money.
OCSL is a business development corporation (BDC), a type of non-bank lender that is required by law to pass over 90% of its earnings on to shareholders. In exchange for passing 90% of its income to shareholders, it gets tax-exempt status.
Oaktree Specialty Lending is a riskier than average investment. It lends money to companies that conventional banks consider too risky to lend to. As a result of this, it sometimes loses money on the loans it issues. The flip side of this is that OCSL has a very diversified portfolio of loans, so a loss here or there isn’t fatal. BDCs like Oaktree aren’t for everyone, but I’m comfortable holding OCSL as one of my smaller positions.
