How to Use Your TFSA to Earn $5,000 Per Year in Tax-Free Income

Adding these two top dividend stocks could help you create a reliable income-generating portfolio within your TFSA.

Have you ever thought about how your Tax-Free Savings Account (TFSA) could actually pay you $5,000 per year tax-free? Most Canadians think of the TFSA as just a place to park their cash or save for short-term goals, but it’s actually so much more than that. By focusing on high-quality dividend stocks, you can turn your TFSA into an amazing income machine. Imagine earning thousands every year, tax-free, and using that money however you like.

In this article, I’ll highlight two of the best Canadian dividend stocks that you can consider adding to your TFSA now to expect to receive $5,000 in tax-free income every year.

Blocks conceptualizing Canada's Tax Free Savings Account

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Labrador Iron Ore Royalty stock

Headquartered in Toronto, Labrador Iron Ore Royalty (TSX: LIF) is the first top dividend stock you may want to add to your TFSA now. It currently has a market cap of $1.9 billion as its stock trades at $29.66 per share after witnessing 7% value erosion so far in 2024. Nevertheless, this negative movement in its share prices has made its dividend yield look even more attractive, which currently stands at 9.4%.

If you don’t know it already, Labrador Iron Ore holds slightly more than 15% equity interest in the Iron Ore Company of Canada (IOC), which is one of the top producers of iron ore concentrate and pellets. While Labrador faced lower iron ore prices, reduced pellet premiums, and slightly lower concentrate production due to unforeseen events like forest fires and maintenance adjustments in the September quarter, its results still reflected the underlying strength of its business model. For example, its quarterly pellet sales tonnages increased by 11% YoY (year over year), hinting at a steady operational recovery and focus on quality production.

Moreover, the company’s ability to maintain strong cash flows and consistent royalty revenues even during challenging market conditions makes it an excellent dividend-paying stock for TFSA investors.

Veren stock

Previously known as Crescent Point Energy, Veren (TSX: VRN) is another attractive dividend stock to consider for your TFSA. This Calgary-based oil producer currently has a market cap of $4.6 billion as its stock trades at $7.43 per share. At this market price, VRN stock offers a juicy 6.2% annualized dividend yield.

In the trailing 12 months, Veren’s total revenue has risen 5.7% YoY to $3.7 billion as it continues to focus on expanding its high-quality asset base. The company generated $114 million in excess cash flow in the third quarter alone, with full-year projections reaching $625 million.

With its strategic investment in infrastructure and advanced drilling techniques, Veren is not only striving to enhance operational efficiency but also working to improve its long-term growth outlook.

COMPANYRECENT PRICENUMBER OF SHARESDIVIDEND PER SHAREPAYOUT FREQUENCYTOTAL ANNUAL PAYOUT
Labrador Iron Ore Royalty$29.661,540$0.70Quarterly$4,312
Veren$7.431,540$0.115Quarterly$708
Total$5,020
Prices as of Nov. 29, 2024

Foolish bottom line

If you buy 1,540 shares of each Labrador Iron Ore Royalty and Veren, you could generate about $5,020 in annual tax-free income through your TFSA based on their current dividend yields. This portfolio would give you exposure to two stable market sectors: mining and energy. This example should give you a fair idea of how dividend investing can help transform your TFSA into a consistent income source. However, acquiring 1,540 shares of each company would require roughly $57,120 in capital, which is a huge commitment for many investors. That’s why, instead of investing such a large sum of money in just two stocks, it would be much wiser to diversify your portfolio further by including additional dividend-paying stocks across different sectors.

Fool contributor Jitendra Parashar has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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