HOW TO USE YOUR TFSA TO EARN $25,800 PER YEAR IN TAX-FREE INCOME

The Tax-Free Savings Account (TFSA) is gaining popularity among Canadians due to its flexibility and tax-sheltered status. Introduced in 2009, the cumulative TFSA contribution room has increased to $95,000 in 2024. As any returns held in the registered account are exempt from Canada Revenue Agency taxes, it makes sense to hold quality dividend growth stocks in the TFSA and benefit from outsized gains over time.

One such TFSA stock you can own right now is TerraVest Industries (TSX:TVK). Let’s see why.

An overview of TerraVest Industries

Valued at $1.92 billion by market cap, TerraVest Industries is a diversified industrial company that sells goods and services to a variety of end markets. It is a leading manufacturer of home heating products, propane, anhydrous ammonia, natural gas liquids, storage vessels, and energy processing equipment.

In the last 12 months, TerraVest acquired three companies:

• Advanced Engineered Products: A Canadian manufacturer and service provider that operates in the tank trailer industry.
• Highland Tanks: A manufacturer of fuel and chemical storage tanks, wastewater storage and treatment tanks, LPG vessels, and other custom-built steel storage products.
• LV Energy Services: It provides water management and other related services in the Western Canadian energy industry.

TerraVest Industries has been among the best-performing TSX stocks in the past decade, rising more than 2,000% since September 2014.

A strong performance fiscal Q3 of 2024

In the fiscal third quarter (Q3) of 2024 (ended in June), TerraVest increased its sales by 58% year over year to $238.12 million, primarily due to the acquisitions mentioned above. If we adjust for organic growth, its sales were up 14% compared to the year-ago period. TerraVest attributed its double-digit organic sales growth to higher demand in the Service segment and for compressed gas, distribution equipment, and residential and commercial petroleum tanks.

Its net income rose 50% year over year to $14.38 million due to acquisitions and increased sales from its base portfolio of businesses. However, the increase in net income was partially offset by acquisition-related costs, higher financing costs, higher balance sheet debt, and rising interest expenses.

Massive opportunity for dividend growth

TerraVest’s operating cash flow in Q3 more than doubled to $45.30 million due to higher net income and lower inventory levels. Comparatively, its cash available for distribution rose from $13.29 million to $32 million in the last 12 months. Its dividend expense in Q3 stood at just $2.72 million, indicating a payout ratio of just 9%. We can see that TerraVest has enough room to increase its dividends in the future. For instance, it has raised dividends by 50% in the last two years.

TerraVest continues to invest in capital expenditures, which should drive future cash flow and dividends higher. In Q3, the company spent more than $3.5 million to expand its rental fleet and invest in a new manufacturing product line.

The TSX stock is not very expensive at 30 times forward earnings, given analysts forecast earnings to rise by 24.5% year over year to $4.17 per share in 2025. So, if the stock trades at a similar multiple, it should be priced at $125 in September 2025.

The Foolish takeaway

An investment of $95,000 in TerraVest stock would help you purchase 962 company shares. If the stock is priced at $125 in the next 12 months, your investment would balloon to $120,250. Moreover, your dividend payout will total $577, bringing the cumulative returns to $25,827.

This is an example of how you can use the TFSA to identify quality growth stocks and generate over $25,000 in tax-free passive income each year. You must add other such companies to your watchlist and further diversify your portfolio to lower investment risk.

The post How to Use Your TFSA to Earn $25,800 Per Year in Tax-Free Income appeared first on The Motley Fool Canada.

More reading

• TFSA Investors: 3 Stocks to Turbo-Charge Your Tax-Free Portfolio
• The Best Canadian Stocks to Buy With $1,000 Right Now
• TFSA: 4 Canadian Stocks to Buy and Hold Forever

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends TerraVest Industries. The Motley Fool has a disclosure policy.

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