The TFSA (Tax-Free Savings Account) is a great place to earn passive income tax-free. When you invest in your TFSA, all stock income stays with you. It is safe from the Canada Revenue Agency. Even when you withdraw cash from your TFSA, there is no reporting or tax requirement.
Source: Getty Images
Use your TFSA to compound wealth faster
Investing in the TFSA is a simple and easy way to compound your capital faster. Canadians are lucky for the many dividend stocks that can earn them passive income. Real estate, royalties, and industrials are great places to look for monthly dividend income opportunities for a TFSA.
First Capital REIT: A quality real estate stock with a 4.9% yield
First Capital Real Estate Investment Trust (TSX: FCR.UN) is an attractive stock for compounding passive income. In fact, if you invested your $7,000 TFSA contribution in First Capital today, it could become $15,800 in 10 years or less. Here are some reasons why First Capital REIT is an interesting buy for monthly passive income in your TFSA.
With $9.2 billion in assets, 21.9 million square feet of leasable area, and 136 shopping centres, First Cap is the largest urban-focused retail landlord in Canada. The company focuses on retail that is strategically located in the heart of Canada’s largest cities. Consequently, it can attract the best quality tenants, maintain high occupancy, and demand persistent rental rate growth.
A recession-resilient stock for a TFSA
Its properties are grocery anchored and complemented with essential-service type tenants (like medical professionals, discount stores, pharmacies, banks, and restaurant chains). As a result, this REIT is very recession-resilient. People need its tenants’ services, and its tenants want to be in the best locations (which First Cap owns).
The REIT sits with 97% occupancy. It has grown base rents by a 3% compounded annual rate for nearly 20 years. Likewise, net operating income has averaged about 3% in that same time frame.
Recently, First Capital has been selling off non-core assets and reducing debt leverage. Today, it sits with 68% of its assets unencumbered. This provides it considerable balance sheet flexibility should it need it in another market downturn.
A cheap stock that could double your money over time
First Cap stock is cheap and trades at a significant discount to its private market value. The REIT has significant development assets that are not even factored into the stock price.
If investors want a low-risk income stream in their TFSA, First Cap can provide that. The REIT yields 4.9% right now. If you put $7,000 into this stock, you would earn around $28.55 per month in distribution income. That equates to $342 of passive income per year.
If you reinvested that income into buying First Cap stock for 10 years, you would end up with around $3,420 worth of stock. At the same time, if the stock can deliver a modest 5% average return (2% from valuation re-rating and 3% from income growth), you would end up with a total investment worth $15,800 or more. If you stopped reinvesting, you would earn a substantial income stream on that $15,800.
It all adds up to a nice doubling of your money in 10 years. Since you pay no tax in your TFSA, all your earnings and gains stay with you.
The Foolish bottom line
The whole point is to demonstrate that even a boring, low-risk, low-growth income stock can still provide an attractive reward. The combination of modest growth, dividend reinvestment, and tax-free compounding inside a TFSA can be a potent reward for patient investors.
