How to Use Your TFSA to Earn $2,547 Per Year in Tax-Free Income

Long-term Canadian investors should consider holding a diversified portfolio of dividend-growth stocks in a Tax-Free Savings Account (TFSA). This strategy should help Canadians benefit from a steady stream of dividend income and capital gains, both of which are exempt from taxes when held in the TFSA.

The TFSA is a popular registered account that was introduced 15 years back. While the maximum TFSA contribution room has increased to $95,000 in 2024, the average value of investments in the account was closer to $41,000 at the start of the year.

So, let’s see how you can invest $40,000 in a TFSA to earn more than $2,000 per year in tax-free income.

Invest in blue-chip stocks such as Enbridge

Valued at $126 billion by market cap, Enbridge (TSX: ENB) is a diversified energy infrastructure company. It has five primary business segments that include:

• Liquid Pipelines: It operates pipelines and terminals to transport various grades of crude oil and other liquids hydrocarbons in North America.
• Gas Transmission and Midstream: It invests in natural gas pipelines and gathering and processing facilities in Canada and the U.S.
• Gas Distribution and Storage: The business is involved in natural gas utility operations, serving residential, commercial, and industrial customers, as well as natural gas distribution and energy transportation activities.
• Renewable Power: It operates power-generating assets such as wind, solar, geothermal, and waste heat recovery facilities.
• Energy Services: The segment provides energy marketing services to refiners and producers in Canada and the U.S.

Enbridge’s widening base of cash-generating assets allows it to pay shareholders an annual dividend of $3.66 per share, translating to a forward yield of 6.4%. Moreover, these payouts have risen from just $0.27 per share in 1997.

Despite the cyclical nature of the energy sector, Enbridge has raised its dividend payout each year for 29 consecutive years. With a dividend payout ratio of less than 70%, Enbridge has the flexibility to target accretive acquisitions, lower balance sheet debt, and continue to raise its quarterly payout.

The key reason for Enbridge’s strong dividend growth profile is the resiliency of its cash flow and earnings. More than 80% of its cash flow is backed by inflation-linked long-term contracts, making the energy giant relatively immune to fluctuations in commodity prices.

Enbridge’s growth story is far from over, given it recently closed the acquisition of three gas utilities from Dominion Energy in a $19 billion deal. These gas utilities should further diversify Enbridge’s cash flow in the future, making the TSX stock a top investment in October 2024.

The Foolish takeaway

An investment of $40,000 in ENB stock will help you purchase 696 company shares and earn close to $2,550 in annual dividend income. If the company raises the payout by 7% annually, your dividend income will double in the next decade, enhancing the effective yield over time.

In the last 20 years, ENB stock has returned 346% to shareholders. However, if we adjust for dividend reinvestments, cumulative returns are much closer to 1,000%. Identifying other fundamentally strong stocks with an attractive yield is essential to diversifying your portfolio and lowering investment risk.