Got $14,000? Turn Your TFSA Into a Cash-Gushing Machine

Want some strong passive income from your TFSA? Consider these two stocks.

Amy Legate-Wolfe

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote: “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published February 10, 2025 5:00 pm EST

Turning your Tax-Free Savings Account (TFSA) into a cash-generating powerhouse is a goal many Canadian investors share. With a contribution of $14,000, strategically investing in high-quality dividend stocks can set you on the path to achieving this objective. Two compelling options to consider are Freehold Royalties (TSX: FRU) and Exchange Income (TSX: EIF). Let’s delve into why these dividend stocks stand out.

Blocks conceptualizing Canada's Tax Free Savings Account — Source: Getty Images

Freehold Royalties

Freehold Royalties is a prominent player in the energy sector, focusing on acquiring and managing oil and gas royalties. This business model allows the company to generate revenue without the operational risks typically associated with exploration and production activities.

As of writing, FRU’s stock is trading at approximately $12.63 per share. The company offers a forward annual dividend of $1.08 per share, yielding about 8.5%. This attractive yield is a testament to Freehold’s commitment to returning value to shareholders.

In its third-quarter 2024 earnings report, Freehold reported earnings per share (EPS) of $0.17, surpassing analyst expectations. While this is a positive indicator, it’s essential to monitor the company’s performance in the upcoming quarters to ensure sustained growth.

Looking ahead, Freehold’s strategic acquisitions, such as the recent Midland Basin deal, position the company for continued revenue growth. These investments are expected to enhance the company’s royalty portfolio, potentially leading to increased cash flows and, consequently, higher dividends for investors.

Exchange Income

Exchange Income is a diversified, acquisition-oriented company focusing on sectors such as aerospace, aviation, and manufacturing. This diversification provides a buffer against sector-specific downturns, contributing to the company’s financial stability.

As of writing, EIF’s stock is priced around $53.69 per share, with a forward annual dividend of $2.64, yielding approximately 4.9%. Notably, EIF distributes dividends monthly, offering investors a regular income stream. This can be particularly appealing for those seeking consistent cash flow.

In the third quarter of 2024, Exchange Income reported EPS of $0.86, reflecting a solid performance. The company’s diversified operations have been instrumental in maintaining resilience amid varying economic conditions. Looking forward, EIF’s strategy of acquiring profitable businesses in niche markets is expected to drive future growth. The company’s focus on disciplined acquisition criteria and effective integration processes bodes well for sustained earnings and dividend growth.

Creating the perfect TFSA

Allocating your $14,000 investment equally between FRU and EIF would involve purchasing approximately 555 shares of FRU and 130 shares of EIF, based on current prices. This balanced approach provides exposure to both the energy sector’s stability and the diversified growth potential of EIF.

Reinvesting the dividends received from these investments can significantly enhance your portfolio’s growth over time. By purchasing additional shares with your dividend income, you can benefit from compounding returns, thereby accelerating your TFSA’s value appreciation.

One of the most compelling benefits of utilizing a TFSA is the tax-free growth on investments. The dividends and capital gains earned within a TFSA are not subject to Canadian income tax, thus allowing your investments to compound more efficiently compared to taxable accounts.

While FRU and EIF are strong candidates for a dividend-focused TFSA strategy, it’s crucial to regularly review your portfolio’s performance. Stay informed about each company’s financial health, industry trends, and broader economic factors. Being proactive allows you to make informed decisions and adjust your holdings as needed to align with your financial goals.

Bottom line

Transforming your TFSA into a cash-generating machine is achievable with thoughtful investment choices. Freehold Royalties and Exchange Income offer attractive dividend yields and growth prospects, making them worthy considerations for your portfolio. Remember, while these stocks provide potential for income and growth, it’s essential to assess your risk tolerance and investment objectives. Consulting with a financial advisor can provide personalized guidance tailored to your financial situation.