If you like tax-free passive income, the TFSA (Tax-Free Savings Account) is the place to invest. Inside the TFSA you can invest in a wide array of investment products (including bonds, mutual funds, exchange traded funds, indexes, and individual stocks) and earn income that is completely safe from any tax.
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The TFSA can help you bolster annual returns by as much as 20%
You can bolster your annual returns by as much as 20% per annum by simply investing inside of a TFSA. It is possible to earn as much as $500 per month in passive income in the account.
In order to achieve that amount, you would likely need to maximize your total TFSA contribution room of $109,000. To hit your $500 per month target, you would need at least a portfolio yield of 5.5%. Given the strength in financial markets, yields on the best dividend companies have compressed this year. To hit that target, you may unfortunately have to look for slightly lower quality businesses.
Chase a +5% yield at your own risk
As dividend yields get higher, investors need to be more cautious. Dividend yields over 7% likely have some serious business or financial risks that are causing the market to doubt the dividend is sustainable.
Personally, I prefer a smaller dividend that is growing sustainably. Dividend growth maintained by income growth sets investors up for a total return win. Even if I can’t hit my income target today, it won’t be long until I do as those dividends continue to grow.
However, some investors might require that 5.5% dividend yield to hit their TFSA income target. If you are wondering how to get there, these two dividend stocks could accelerate a path to $500 per month.
Gibson Energy: A solid TFSA income stock if it can hit growth targets
Gibson Energy (TSX:GEI) yields 5.8% today. It operates a mix of crucial energy storage, midstream, and export terminals across North America. Around 75% of its income is contracted. The remaining is exposed to commodity pricing. However, that can be a benefit when energy prices are elevated (like the present).
Gibson is targeting around 7% annual adjusted earnings before interest, tax, depreciation and amortization (EBITDA) growth all the way to 2030. After a recent acquisition, its payout ratio is a little stretched. However, it aims to hit closer to 70–80%.
Gibson has raised its dividend for seven consecutive years. That dividend has risen by a 5.2% compounded annual growth rate (CAGR). If you think it can hit its growth targets, Gibson could be a good income bet for a TFSA.
South Bow: Its income is safe, but there are some risk caveats
South Bow (TSX:SOBO) yields 5.4% today. It is the spun-out 4,327km Keystone Pipeline System assets from TC Energy. This is an essential pipeline to the North American energy industry. The network extends from Fort McMurray to tidewater in Houston. It has a variety of other network extensions, but the Keystone Pipeline is its main asset. It is a vital, irreplaceable asset in North America.
The pipeline has over 95% utilization and over 90% of its capacity is fixed on long-term contracts. The average contracted term is over 7 years, so its income stream is pretty reliable.
This company’s balance sheet is a bit elevated with debt. Likewise, its payout ratio is higher than most investors would be comfortable with. However, if a TFSA investor just wants an income return, they are likely okay just holding this stock. There could be upside from promising new pipeline projects in the U.S.
