How I’d Invest $7,000 in My TFSA for $660 in Tax-Free Annual Income

Canadians have plenty of taxes to contend with, making it incredibly difficult to get the best use out of any savings they have to contribute to their retirement plans or any short- or long-term financial goals. Fortunately, the Tax-Free Savings Account (TFSA) has been a big blessing for Canadians since the account type was introduced in 2009.

As the name suggests, the TFSA is an account that you can use to enjoy returns on savings in the account without incurring taxes. However, the tax-sheltered returns in the account are not limited to interest earned on cash held in a TFSA. You can use the TFSA as an investment vehicle to hold more than cash, including investments in the stock market.

This means that any returns on dividends or capital gains from holdings in the account can grow your wealth without any taxes. Each year, the Canada Revenue Agency (CRA) increases the TFSA contribution limit. For 2025, the new contribution limit is $7,000. If I were to use the new contribution room, here’s a quick look at how I’d try to earn around $600 in tax-free income each year by investing in two TSX dividend stocks.

Dividend investing

Dividend stocks are publicly traded companies offering investors quarterly or monthly payouts from profits to reward them for loyalty. Investing in a dividend stock and holding its shares in a TFSA effectively lines your account balance with extra cash. You can then reinvest the dividend income to purchase more shares of dividend stocks, unlocking the power of compounding to accelerate your wealth growth in a TFSA. I will discuss two high-quality dividend stocks you can use with a hypothetical $7,000 contribution room.

Cardinal Energy

Cardinal Energy (TSX: CJ) is a Calgary-based, $916.57 market capitalization company that engages in the acquisition, exploration, and production of petroleum and natural gas in Saskatchewan and Alberta. The company generates sizeable revenue through its operations, which it uses to expand its portfolio and deliver returns to investors through shareholder dividends every month.

As of this writing, CJ stock trades for $5.71 per share and boasts a 12% annualized forward yield. Considering that you are getting paid that much for simply owning the stock, that is a pretty good return on your investment. The company’s latest earnings for the end of 2024 saw it report $65.1 million in the quarter, showing a marginal improvement from the same quarter in the previous year. It can be a safe bet to consider for dividend income.

Doman Building Materials Group

Doman Building Materials Group (TSX: DBM) is a $616.95 market capitalization company headquartered in Vancouver. It is a wholesale distributor of various materials used in home renovation and construction, servicing several markets. Provides materials for industrial, new home construction, and home renovation markets. It also owns and manages several private timberlands and forest licenses, diversifying its revenue streams further.

The vertically integrated building material group reported a 28.5% net decline in its 2024 earnings due to lower pricing for certain construction material categories, but it is a resilient business that has demonstrated the ability to overcome challenges time and again. As of this writing, it trades for $7.08 per share and boasts a 7.91% forward annualized dividend yield that it distributes on a quarterly schedule.

Foolish takeaway

Using the TFSA contribution room to build a portfolio of reliable dividend stocks can provide significant, tax-free returns. While you should never put all your eggs in one or two baskets, below is an example illustrating how you can use $7,000 in a TFSA to generate more than $600 per year in extra income that you can enjoy tax-free.