How to Use Your TFSA to Earn $6,905.79 Per Year in Tax-Free Income

Put together a TFSA and this TSX stock, and you could create massive passive income from returns and dividends.

| More on:
calculate and analyze stock

Image source: Getty Images

The Tax-Free Savings Account (TFSA) is a Canadian gem for medium-term investments, especially if your focus is on earning passive income through dividends. Unlike other investment accounts, any growth in your TFSA from capital gains or dividends is entirely tax-free. That’s right, no tax headaches when it’s time to withdraw your funds. This makes it perfect for medium-term goals like buying a new home or funding a dream vacation. So, let’s get started.

Maximize that growth

When it comes to maximizing your TFSA’s potential, Brookfield Asset Management (TSX:BAM) stands out as a stellar choice on the TSX. BAM is a leader in alternative asset management, focusing on real estate, renewable energy, and infrastructure: all sectors poised for growth in a world increasingly emphasizing sustainability and urbanization. With a forward annual dividend yield of 2.74%, BAM offers consistent passive income that fits perfectly in your TFSA.

BAM’s recent performance underscores its stability and growth potential. The stock climbed significantly, sitting at a 52-week high of $81.18, compared to a low of $45.48. This upward momentum reflects strong investor confidence and the company’s robust earnings. In the most recent quarter, BAM reported a 5.7% year-over-year earnings growth and a net income attributable to common shareholders of $450 million. That’s a solid foundation for any medium-term investor.

One of BAM’s key strengths is its diversified revenue streams. Its investments in real assets, including renewable energy and real estate, provide exposure to sectors that tend to perform well even during economic turbulence. With an operating cash flow of $594 million and a forward price-to-earnings (P/E) ratio of 28.17, BAM demonstrates both financial stability and room for growth.

Looking ahead

Looking to the future, BAM’s strategic initiatives are impressive. Its focus on renewable energy aligns with global shifts toward green energy, positioning it as a leader in the space. Furthermore, its extensive real estate holdings capitalize on urban development trends, while its infrastructure investments provide resilience against market volatility. Analysts expect continued growth in earnings, dividends, and stock value, making BAM a compelling medium-term investment.

The TFSA is particularly effective for medium-term goals because of its flexibility. Unlike a Registered Retirement Savings Plan (RRSP), you don’t have to worry about withdrawal penalties. And unlike taxable accounts, you won’t lose a chunk of your earnings to taxes. By holding dividend stocks like BAM in your TFSA, you can reinvest your earnings and let compounding work its magic. Completely tax-free.

BAM stock’s dividend policy is another reason it’s an ideal TFSA stock. While its payout ratio currently sits at a high 133.94%, its diverse and stable revenue streams ensure its dividends remain sustainable. This makes it a reliable choice for passive income, even as you grow your TFSA balance over the medium term.

Bottom line

Looking back, we can see that BAM stock enjoyed a compound annual growth rate of 43% in the last two years alone! So, if we see another 43% growth and add in dividends, here is what a $15,000 could bring in.

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCYINVESTMENT
BAM – now$78.72191$2.12$404.92quarterly$15,000
BAM – 43%$112.57191$2.12$404.92quarterly$21,500.87

That’s right; you could continue to earn $404.92 in dividends and $6,500.87 in returns. That would total $6,905.79 in returns! Therefore, pairing your TFSA with a powerhouse stock like Brookfield Asset Management is a match made in financial heaven. The TFSA’s tax-free structure amplifies your returns, while BAM’s strong earnings, sustainable dividend policy, and promising growth outlook make it a perfect fit for medium-term investments. If you’re looking to grow your savings without worrying about the taxman, this duo could be your ticket to financial success.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Brookfield Asset Management. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Blocks conceptualizing the Registered Retirement Savings Plan
Dividend Stocks

CPP at 70: Is it Enough if Invested in an RRSP?

Even if you wait to take out CPP at 70, it's simply not going to cut it during retirement. Which…

Read more »

a person looks out a window into a cityscape
Dividend Stocks

1 Marvellous Canadian Dividend Stock Down 11% to Buy and Hold Immediately

Buying up this dividend stock while it's down isn't just a smart move, it could make you even more passive…

Read more »

happy woman throws cash
Dividend Stocks

Step Aside, Side Jobs! Earn Cash Every Month by Investing in These Stocks

Here are two of the best Canadian monthly dividend stocks you can consider buying in December 2024 and holding for…

Read more »

chip with the letters "AI" on it
Dividend Stocks

The Top Canadian AI Stocks to Buy for 2025

AI stocks are certainly strong companies, and there are steady gainers in Canada as well. But these three are the…

Read more »

calculate and analyze stock
Dividend Stocks

2 High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These stocks pay attractive dividends for investors seeking passive income.

Read more »

ETF chart stocks
Dividend Stocks

Here Are My 2 Favourite ETFs for December

Two dividend-paying ETFs are ideal investments for their monthly dividends and medium-risk ratings.

Read more »

Canada Day fireworks over two Adirondack chairs on the wooden dock in Ontario, Canada
Dividend Stocks

Here’s How Much Canadians Age 65 Need to Retire

Do you want to retire but need to catch up? A dividend stock like this top choice is the perfect…

Read more »

bulb idea thinking
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These three top stocks offer attractive and sustainable dividend yields, and they're undervalued, making them some of the best to…

Read more »