Generating a reliable passive income stream through stock market investing does not mean you must have millions of dollars to throw into the market. Even when you start small, investing your money smartly in the stock market and using the right investment vehicle for your holdings can help you set yourself up for financial freedom down the line.
Investing in high-quality and reliable Canadian dividend stocks and holding them in a Tax-Free Savings Account (TFSA) might just do the trick. Suppose you have enough contribution room available in your account and $10,000 that you are itching to invest. In that case, I would recommend splitting it evenly across TELUS (TSX:T) and Enghouse Systems (TSX:ENGH) stock.
It can be the simplest way to build a growing income stream that the Canada Revenue Agency (CRA) will not tax.
Source: Getty Images
Telus
Telus is a favourite pick for many investors from the telecom sector. Canada’s telco industry is largely consolidated, and Telus is one of the Big Three in this sector. The company offers vital wireless and internet connectivity. These are things that people do not let go of when cutting costs during troubling economic environments. Besides its core business, Telus has a growing health business that adds another growth avenue for the company, driving more growth for its investors.
The harsh economic conditions have not been easy on its share prices. As of this writing, it trades for $16.93 per share and is down by around 27% from its 52-week high. Due to declining share prices, its dividend yield has inflated to a juicy 10%. Investing in the stock right now means locking in higher-than-usual-yielding dividends and setting yourself up for wealth growth through future capital gains as the stock recovers.
Enghouse Systems
Enghouse Systems is another stock that can make a good case as a buy-and-hold investment for income and capital gains. The company focuses on providing mission-critical and vertically focused enterprise software solutions for businesses across several sectors. Even though tech stocks have fallen from unprecedented highs a few years ago, Enghouse Systems is an atypical one that offers high-yielding dividends that investors cannot ignore.
As of this writing, Enghouse Systems stock trades for $17.45 per share and pays investors $0.31 per share each quarter. After declining by over 36% from its 52-week high, it boasts an inflated 7.1% dividend yield. The company has increased payouts for 18 consecutive years, supported by a solid balance sheet and sustained demand for its solutions. I think it can be an excellent investment at current levels for tax-free income and growth-focused investors.
Foolish takeaway
While I recommended splitting the $10,000 between these two stocks, it is still only a hypothetical scenario. Realistically, I would advise spreading this amount across several high-quality dividend stocks and building a self-directed income-focused portfolio in a TFSA. Putting all your eggs in one or two baskets isn’t the wisest decision. Diversifying it across several high-quality investments can protect your capital while providing significant returns.
The real key to success would be to consistently reinvest dividends to own more shares of the stock. This way, you can unlock the power of compounding to reach your long-term financial goals faster than you would otherwise.
