How to Use Your TFSA to Earn $1,057/Year in Tax-Free Income

Investors seeking regular passive income without the tax burden could consider buying Canadian dividend stocks using their Tax-Free Savings Account (TFSA). Within a TFSA, capital gains and income from dividends remain shielded from taxation, providing a significant advantage for investors seeking to maximize their earnings.

Here’s an example of how using the TFSA can help you earn over $1,057 annually in tax-free income.

TFSA income stock #1

SmartCentres REIT (TSX: SRU.UN) distributes most of its earnings as dividends, making it a compelling bet for TFSA investors seeking to generate tax-free income. This real estate investment trust (REIT) owns core retail properties that generate solid same-property net operating income (NOI), enabling it to pay dividends consistently. Further, its diversified real estate portfolio, anchored by essential businesses, including grocery stores, adds stability to its financials through all economic cycles and supports its payouts.

It pays a dividend of $0.154 per share every month, which equals an impressive yield of 7.4% near the current market price.

SmartCentres will continue to benefit from its resilient real estate portfolio and solid tenant demand and retention rates. Further, high cash collection and occupancy rates from core retail properties will continue to support robust rental income. In addition, SmartCentres’s expansion into industrial, residential, and self-storage developments will diversify its revenue and support long-term growth. With long-term contracts and its substantial land bank, the REIT remains well-positioned to sustain and potentially increase dividends.

TFSA income stock #2

Telus (TSX: T) is another top pick among TFSA investors thanks to its impressive track record of paying higher dividends. This communication giant has paid over $21 billion in dividends since 2004 and has increased them 27 times since 2011. Telus also maintains a dividend payout ratio of 60–75% of its free cash flow, which is sustainable and allows it to reinvest and raise dividends in the future. Currently, Telus stock offers an attractive yield of over 7.7%.

The telecom company looks well-positioned to return higher cash to its shareholders. Its high-quality asset base, investments in network infrastructure, and focus on revenue diversification will likely drive profitability even in challenging economic conditions, supporting payouts. Its ability to expand its customer base, lower the churn rate, and focus on cost efficiency will further support its bottom line and payouts.

TFSA income stock #3

TFSA investors looking for a tax-free income stream could consider First National Financial (TSX: FN). It is a mortgage financing solutions provider in Canada’s residential and commercial real estate markets. The firm has a solid record of paying and consistently increasing its dividend.

Since 2006, the financial services company has raised its dividend 17 times, thanks to its growing earnings base. The expansion of its mortgages under administration (MUA) is boosting its earnings, enabling it to deliver higher dividends. Currently, it offers a healthy yield of 6.2%.

First National is well-positioned to pay and increase its dividends in the coming years, driven by its steady mortgage portfolio growth and solid capital allocation strategy. Its $44 billion portfolio of mortgages pledged under securitization and a $106 billion servicing portfolio will position it well to generate steady earnings and cash flow, supporting its payouts.

Further, its significant single-family mortgage renewal book bodes well for future income and dividend growth. Moreover, lower interest rates and higher demand for mortgage financing could further boost the company’s financials and lift its payouts.

Earn $1,057 tax-free every year

SmartCentres REIT, Telus, and First National are reliable dividend stocks to add to your TFSA portfolio to generate a tax-free income. The table below shows that a $5,000 investment in each of these stocks can help you earn over $1,057 per year in tax-free income.