A tip to earn higher passive income is to invest in stocks that offer higher yield or higher dividend growth through your Tax-Free Savings Account (TFSA). Let’s understand how dividends work, and you can make it work for you.
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How do dividends work?
Most companies have a business model that allows them to generate stable cash flow. These companies need not be mature, large-cap companies. They can also be growth companies. The first thing you should look at is whether the company’s free cash flow (FCF) is stable and growing. Then, look at the dividend payout ratio, as a company cannot sustain a 100% payout ratio for long. Lastly, look at the leverage ratio, as unmanageable debt could lead to dividend cuts.
A consistently growing company will also grow its FCF and could offer a higher dividend-growth rate. However, companies with one-off growth may offer special dividends. A mature company could offer safe and regular dividends and may or may not grow it to adjust for inflation.
Which dividend stock is better for TFSA passive income?
If you are looking for immediate payouts that are sustainable for the long term, you can opt for high-yield stocks. They may not offer dividend growth, which means your payouts will remain the same. If you are looking for payouts in the next 10 years or more, you can opt for dividend growth stocks.
Immediate tax-free passive income
Asset management firm Fiera Capital’s (TSX:FSZ) share price fluctuates with Canadian and American equity market performance. The company earns stable cash flow from the base management fee it charges on the assets under management (AUM). Its payout ratio does not exceed 100%.
The scope of dividend growth depends on the AUM growth. As stock markets have been volatile since the pandemic, the company did not grow its dividend. However, the bear momentum has created an opportunity to buy the dip and lock in a 14% yield.
Assuming the company sustains its annual dividend per share at $0.864 for the next five years, you can earn $2,000 in tax-free passive income by buying 2,315 shares of Fiera Capital. As the stock has dipped 43% to $6.15 since mid-November 2024 on bear momentum, you can buy these shares for $14,240, a discount from the $19,680 if the stock were trading at its average price of $8.5.
Future tax-free passive income
If you are looking for future passive income, you can opt for telecom giant Telus (TSX:T). It is steadily growing its FCF by increasing subscriber count and cross-selling services. It pays 60-75% of its FCF as dividends to shareholders and also offers a dividend-reinvestment plan (DRIP). The DRIP keeps buying shares from the dividend income, thereby increasing the share count of the income-generating stocks. Moreover, the company has been growing dividends by 7% annually.
The dividend growth and reinvestment compound your returns and earn $2,000 tax-free passive income on a $10,000 investment, provided you stay invested for 10 years.
| Telus Stock Price | Year | Telus DRIP Shares | Telus Share count | Telus Dividend per share (6% CAGR) | Dividend Income |
| $20.44 | 2025 | 489.0 | $1.6100 | $787.29 | |
| $30.00 | 2026 | 26.24 | 515.2 | $1.7066 | $879.31 |
| $30.00 | 2027 | 29.31 | 544.6 | $1.8090 | $985.10 |
| $30.00 | 2028 | 32.84 | 577.4 | $1.9175 | $1,107.17 |
| $30.00 | 2029 | 36.91 | 614.3 | $2.0326 | $1,248.61 |
| $30.00 | 2030 | 41.62 | 655.9 | $2.1545 | $1,413.20 |
| $35.00 | 2031 | 40.38 | 696.3 | $2.2838 | $1,590.20 |
| $35.00 | 2032 | 45.43 | 741.7 | $2.4208 | $1,795.61 |
| $35.00 | 2033 | 51.30 | 793.0 | $2.5661 | $2,034.99 |
In the above table, we have assumed a 6% average annual dividend growth and an average stock price of $30 for the next five years and $35 beyond that. Even if you stop your DRIP and start taking payouts in 2033, the $2,035 passive income will keep growing as the company grows dividends.
Assuming you hold 793 Telus shares beyond 2033, your TFSA passive income could grow to $3,098 by 2039 at a 6% dividend-growth rate. While this method may look slow and unattractive in the short term, it is rewarding in the long term.
