Here’s How I’d Turn $27,200 Into $1,000 in Annual Dividends

Your Tax-Free Savings Account (TFSA) is going to waste if you are maxing out the contribution room to hold cash. Instead of using cash to earn meager interest income, you can turn your TFSA into a passive income machine that pays without incurring taxes on all your returns. How? By using the available contribution room to build a self-directed portfolio of income-generating assets like high-quality dividend stocks.

Today, I will discuss two TSX dividend stocks that can be ideal holdings for this purpose. To illustrate an example, I will show how a roughly $27,200 investment across these two stocks can generate over $1,000 per year in tax-free dividends alone. Combined with capital gains, the total overall returns will be much greater.

Canadian Utilities

Canadian Utilities Ltd. (TSX: CU) is a darling investment for long-term investors seeking dividends they can count on for decades. It is one of the biggest regulated utility companies in Canada, boasting a $14.4 billion market cap. The company owns energy infrastructure businesses that span electricity and natural gas, transmission, storage, cleaner fuels, and distribution.

Demand for its services is always there due to their essential nature, giving the stock clear earnings visibility and predictability. CU is one of two Canadian dividend stocks that boast a dividend-growth streak spanning more than 50 years. The company’s ability to increase payouts for half a century without fail sets a precedent and shows its ability to continue doing so for many years to come. As of this writing, it trades for $52.68 per share. I feel that it is a compelling holding for any investor’s portfolio.

Keyera

Keyera Corp. (TSX: KEY) is another dividend giant, but in the traditional energy sector. The Calgary-based $17.1 billion market cap firm engages in operating assets in the oil and gas industry. The integrated business model of the energy company has been able to perform well over the years due to strong demand. The fee-for-service assets that it holds also have a growing demand.

The latest quarter saw its share prices decline amid its reporting of a lower adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). While the headlines might seem disappointing, the core business itself is going strong. Keyera even expanded through acquisitions and energy infrastructure projects that position it well for stronger growth in the years to come.

As of this writing, it trades for $58.25 per share, and it could be an excellent investment at current levels.

Foolish takeaway

To generate $1,000 in passive income each year, you’d need an average of about a 3.5% yield with an invested amount of $27,200. Using this amount, divided with a little more weighting to CU stock and some toward KEY stock, you can theoretically generate just over $1,000 per year in tax-free dividend income.

While you should always diversify your investment capital across several high-quality stocks, the table below is a representation of hypothetically investing that amount across these two stocks to earn $1,000 per year that the Canada Revenue Agency (CRA) cannot tax.