Can the stock market earn you regular tax-free income? For Canadians, it can. The Tax-Free Savings Account (TFSA) offers tax-free growth of investment and tax-free withdrawals at any time of any amount. You can use this benefit to create a strong passive income. However, once withdrawn the amount cannot be put back in the TFSA. Your TFSA contribution room is limited. So, choose wisely before you withdraw as the power of compounding can help $530 grow to $1,430 in 10 years if you stay invested. But if you withdraw that amount, you will only get $530.
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TFSA 101: Three strategies to earn tax-free income per year
There are multiple strategies you can use with just one stock to grow your investment income. Which strategy is best suited for you depends on your financial requirements. Suppose your financial requirement is to earn an annual passive income. You can adopt any of the below three strategies.
- Need immediate payouts? Invest the $7,000 TFSA contribution in high-yield dividend stocks that give more than a 7% yield.
- Need payouts in the next 10 years? Invest the TFSA amount in stocks that give dividend growth and offer a dividend reinvestment plan (DRIP).
- Want higher payouts and to build wealth? Invest the TFSA amount in resilient growth stocks like Constellation Software. When you need payouts, you could sell the growth stock and buy a high-yield dividend stock like Telus Corporation (TSX:T). You can also reverse this strategy by investing $7,000 in Telus today as the stock trades at its pandemic low. Instead of reinvesting the dividend in Telus, use it to buy growth stocks and momentum stocks where you have an opportunity to earn a 20–50% return.
The first step is to determine how much annual income you need and when. Once you determine that, you can work out various permutations and combinations to reach the figure.
How to earn $1,430 per year in the future
Telus stock has a 7.5% yield as several industry and business woes surround the company. From high leverage to industry consolidation, rising competition, and regulatory uncertainty. The need for high capital expenditure amid this uncertainty has pulled the stock down to the March 2020 pandemic low. However, the management continued to grow its dividend by 3.4% in November and another 3.4% growth is likely by mid-2025. When making a forecast, it is preferable to keep a conservative outlook as that could help you prepare for uncertainties.
Assuming Telus pauses dividend growth in 2026 and then resumes at 6% annually, a $7,000 investment will grow the DRIP in the following manner.
| Telus Stock Price | Year | Telus DRIP Shares | Telus Share Count | Telus Dividend per Share (6% CAGR) | Total Dividend Amount |
| $21.39 | 2024 | 327 | 327 | ||
| $25.00 | 2025 | 0 | 327 | $1.6222 | $530.47 |
| $28.00 | 2026 | 18.95 | 345.9 | $1.6222 | $561.20 |
| $30.00 | 2027 | 18.71 | 364.7 | $1.7196 | $627.04 |
| $30.00 | 2028 | 20.90 | 385.6 | $1.8227 | $702.76 |
| $30.00 | 2029 | 23.43 | 409. | $1.9321 | $790.19 |
| $35.00 | 2030 | 22.58 | 431.6 | $2.0480 | $883.83 |
| $35.00 | 2031 | 25.25 | 456.8 | $2.1709 | $991.68 |
| $35.00 | 2032 | 28.33 | 485.1 | $2.3012 | $1,116.39 |
| $35.00 | 2033 | 31.90 | 517.0 | $2.4392 | $1,261.17 |
| $35.00 | 2034 | 36.03 | 553.1 | $2.5856 | $1,430.01 |
A $7,000 investment will buy 327 Telus shares at the current share price of below $22. The next dividend is due in 2025. Assuming 6% dividend growth, 327 shares could earn you $530 in dividends. The DRIP will automatically reinvest the dividend to buy more shares of Telus without brokerage or commission fees. Using dividends to buy stocks that earn more dividends could compound your annual income to $1,430 by 2034, assuming the stock price grows to its all-time high of $35.
With DRIP, you only need to invest $7,000 one time and wait for 10 years before withdrawing.
Other ways to earn $1, 430 in TFSA income
If you do not have a higher amount to invest, consider investing $100 each month in Telus and invest a higher amount when you have the liquidity to build a sizeable portfolio in the long term. This way, you can achieve more than $1,430 in annual passive income in 11 years.
Instead of only investing in Telus, you can scout for other companies offering high dividends and give your portfolio a boost.
