HOW TO USE YOUR TFSA TO EARN $5,000 PER YEAR IN TAX-FREE INCOME
The TSX Composite Index, Nasdaq Composite Index, and the S&P 500 Index are in the red as weaker-than-expected U.S. jobs data for August 2024 has increased fears of a recession. The market moves in the most unpredictable manner in a boom period as people have ample liquidity to take risky bets. However, it performs more or less in a similar manner in a weak economy. Many investors cash out their stocks over fears of a dip, creating an opportunity for long-term investors to buy stocks at a sale. Now is a good time to buy attractive dividend stocks at their low and give a boost to your passive-income pool.
How to use TFSA to earn $5,000 per passive income
The Tax-Free Savings Account (TFSA) is the only registered savings account that allows you to withdraw money tax-free. While the 2024 contribution limit is $7,000, you can reinvest any of your stock market earnings that you havenât withdrawn from TFSA.
It is a good time to switch from growth stocks to dividend stocks. If you have any stocks you want to cash down, you can reinvest that money in these stocks and boost up your passive-income stream.
Invest $20,000 and earn $5,000 in annual passive income
To boost your passive income in the long term, it is better to choose stocks that have a higher dividend growth rate. A higher growth rate can compound your investment if you reinvest the dividend and give higher passive income in the long term. At the same time, a high dividend yield can give me high passive income in the short term.
Letâs take the example of Telus (TSX:T) and Manulife Financial (TSX:MFC). Telus has a higher yield of 6.73% against Manulifeâs 4.29%. However, Telus is expected to increase its dividend by 6% and Manulife by 9% in the coming 10 years.
I have put this data in table form for better understanding.
Telus stock
Telus has a higher dividend yield but a lower dividend growth rate. A $10,000 investment would buy you 432 shares that will pay a higher dividend in the short term compared to Manulife. And if you do not invest in Telus’s dividend-reinvestment plan (DRIP), you will continue to get a higher dividend 10 years later.
However, things change when you invest in DRIP. The DRIP reinvests your dividend to buy more dividend-generating stocks. Your share count increases with every dividend declaration. Since dividend stocks do not have many share price fluctuations, DRIP can accumulate more shares if the dividend per share increases.
Considering that the Telus share price has increased to $35, a level the stock has not yet crossed, DRIP will grow the share count from 432 to 817 in 11 years. Assuming the company continues to increase its dividend per share by 6%, 817.2 shares will pay a dividend of $2,374 at $2.9052 per share.
Manulife Financial
If you look at Manulife, the stock is trading at a decade high. It doesnât matter that Manulifeâs yield was lower than Telus’s. Over the 11 years of compounding, Manulifeâs DRIP could generate higher returns of $2.589. Investing $10,000 each in the two stocks could bring you closer to a $5,000 annual passive income in 11 years.
However, these returns could change if the assumptions change. You cannot accurately predict the future, but you can change your assumptions with changing situations.
The post How to Use Your TFSA to Earn $5,000 Per Year in Tax-Free Income appeared first on The Motley Fool Canada.
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More reading
- High-Yield Alert: 3 Canadian Dividend Stocks to Buy Now
- 3 Stocks Ready for Dividend Hikes in 2024
- In 10 Years, You’ll Be Glad You Bought These Magnificent TSX Dividend Stocks
- 3 Remarkably Cheap TSX Stocks to Buy Right Now
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Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy.
2024-09-15T13:44:11Z dg43tfdfdgfd