Stocks that offer a dividend-reinvestment plan (DRIP) automate compounding. However, the drawback of DRIP is that you have to end the plan to get a payout, thereby pausing compounding. Here is a strategy that can continue the compounding effect and also give you a monthly payout.
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The dividend investing strategy to transform your TFSA into a cash-generating machine
Step #1: Invest $10,000 in a dividend-growth stock
You could consider investing in Canadian Natural Resources (TSX:CNQ), which has been growing its dividend at a compounded annual growth rate (CAGR) of 23% in the last 25 years. The oil and gas company can continue growing its dividend because of its cost advantage from low-maintenance oil reserves. It can produce oil at mid-US$40 per barrel after including maintenance and dividends.
Step #2: Reinvest the dividend earned in high-yield stocks
You could consider investing CNQ’s dividend payouts to buy SmartCentres REIT (TSX:SRU.UN), which has a 7% yield. The real estate investment trust’s (REIT’s) biggest strengths are owning Canada’s largest retail property portfolio and its largest tenant, Walmart, from which it earns 23% of its rental revenue. The REIT has a 21-year history of paying dividends. It survived the 2008 Financial Crisis and the 2020 pandemic without dividend cuts.
SmartCentres has been expanding its portfolio to include mixed-use properties through an intensification program, wherein it builds offices, residences, and warehouses near its retail properties. This increases the value of its retail properties, and the REIT earns rent and capital gains from the sale of residential apartments.
There are a few assumptions about the two stocks for this dividend strategy:
- We assumed SmartCentres REIT’s unit price to increase to $27 in 2026, $28 in 2027, and $29 in 2028. From 2029 onwards, we expect the unit price to stabilize at $29.
- We have kept SmartCentres REIT’s distribution per share unchanged, as there is no regular dividend growth.
- For Canadian Natural Resources, we have taken a conservative estimate of a 10% dividend CAGR for the coming 10 years.
How to convert a $10,000 TFSA investment into $2,141 annual cash machine
A $10,000 investment now in Canadian Natural Resources can buy you 227 shares at $44 per share. Since half a year has passed, you are eligible to receive dividends for the next two quarters. These 227 shares could give you $266.73 in dividends at $1.175 dividend per share for two quarters. If you invest this dividend to buy SmartCentres REIT, you can get 10 units at $26 per unit.
| Year | CNQ Annual Dividend Per Share at 10% CAGR | Total Dividend Income on 227 CNQ shares | SmartCentres REIT Units | Total Shares of SmartCentres REIT | SmartCentres REIT Annual Dividend Per Share | Total Dividend Income |
| 2025 | 2.3500 | $266.73 | 10 | 10 | $1.85 | $0.00 |
| 2026 | $2.5850 | $586.80 | 22 | 32 | $1.85 | $18.50 |
| 2027 | $2.8435 | $645.47 | 23 | 55 | $1.85 | $58.71 |
| 2028 | $3.1279 | $710.02 | 24 | 79 | $1.85 | $101.35 |
| 2029 | $3.4406 | $781.02 | 27 | 106 | $1.85 | $146.65 |
| 2030 | $3.7847 | $859.13 | 30 | 136 | $1.85 | $196.47 |
| 2031 | $4.1632 | $945.04 | 33 | 168 | $1.85 | $251.28 |
| 2032 | $4.5795 | $1,039.54 | 36 | 204 | $1.85 | $311.57 |
| 2033 | $5.0374 | $1,143.50 | 39 | 244 | $1.85 | $377.88 |
| 2034 | $5.5412 | $1,257.85 | 43 | 287 | $1.85 | $450.83 |
| 2035 | $6.0953 | $1,383.63 | 48 | 335 | $1.85 | $531.07 |
| 2036 | $6.7048 | $1,522.00 | 0 | 0 | $1.85 | $619.34 |
Since you buy these units at the end of the year, you may get $53.16 in dividend income on these 10 units at the end of 2026. You can repeat the reinvestment process for 10 years. As CNQ increases its dividend, you will have more money to buy more units of SmartCentres REIT. By 2035, you could accumulate 335 units of SmartCentres REIT for which you will get dividends in 2036, which comes to $619.34 (335 x $1.85).
Note that we have rounded off the unit number, as this is not a DRIP. You are buying units from the open market, where you have to buy one whole unit.
Investor benefits
In this strategy, SmartCentres REIT’s dividend will be a cash payout, while the CNQ dividend will be compounded. If you stop reinvesting in the REIT, you will get both CNQ’s quarterly and SmartCentres’s monthly dividends, which add up to $2,141 cash payout in 2036.
