One significant benefit of starting a Tax-Free Savings Account (TFSA)-based passive-income stream is that it doesn’t weigh down your tax bill. No matter how generous of an income you can create from this account, it’s all yours, and the government cannot take a dime. The only limitation is the one associated with the account itself — i.e., its contribution room.
The TFSA contribution room is significantly lower than its tax-sheltered peer Registered Retirement Savings Plan (RRSP). One logical way to circumvent this limitation is to choose the right dividend stocks.
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A power generation company
Capital Power (TSX: CPX) is an Edmonton-based power generation company with a diverse portfolio of assets spread out in Canada and the United States. The power generation capacity is split equally between the two countries, although a higher segment of the adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) comes from Canada (60%).
The company is still heavy on traditional power generation sources (fossil) and has a total of 19 facilities with a generation capacity of 7.8 gigawatts (GW). Renewables capacity, in comparison, is 1.49 GW (mostly wind).
This mix hasn’t harmed the company’s performance, and even though the stock has slumped multiple times in the last five years, the overall direction has remained up, and it returned over 60% in that period. It’s also offering dividends at a healthy yield of about 5.1%.
If you park $20,000 in the company now, you can start a passive income of about $85 a month ($1,020 a year), and your capital may grow to $32,000 in the next five years.
A bank
Canadian bank stocks are among the most popular dividend picks in the TSX. All six major banks are Dividend Aristocrats with stellar histories. This includes Bank of Nova Scotia (TSX: BNS), which is recognized as the second-oldest dividend-paying institution in the country. The bank is currently trading at a discount of about 21%.
This has pushed the bank’s yield to 5.8%. If you invest $20,000 in the bank stock, you can start a monthly income of about $96 ($1,160 a year). The discount might also lead to decent capital appreciation once the stock goes bullish again, and even though its recent history indicates otherwise, the bank may offer decent growth potential in the long term.
An energy stock
When it comes to dividend payers from the energy sector, one stock most investors either have or seriously consider in Canada is Enbridge (TSX: ENB).
It’s one of the oldest Aristocrats in the energy sector with 29 consecutive years of dividend growth. The growth used to be quite ambitious in the past, but the company wisely made the decision to keep it to a reasonable level, which may ensure many more decades of dividend growth for this energy giant.
It’s offering a juicy yield of about 6.5%. So, if you buy $20,000 worth of Enbridge stock, you may start generating about $108 ($1,300 a year) in passive income every month.
Its business model that focuses on energy transportation (via pipelines) instead of extraction makes it less vulnerable to energy price fluctuations. However, the flip side is that it may also lag behind when the rest of the sector is bullish.
Foolish takeaway
Collectively, the three stocks can help you generate a passive income of about $3,480 a year if you invest $60,000 in them, split equally.
All three companies are among the leaders in their respective sectors and have stable business models and stellar histories. So, they offer a healthy combination of reliability and return potential.
