September 28, 2023

Saluti Law Medi

Rule it with System

How to Use Your TFSA to Earn $2,934.54 Per Year in Tax-Free Income

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The Tax-Free Savings Account (TFSA) is one of the best uses of Canadian investors’ time. Investors can put cash away as often as possible, as long as they stay within the contribution limit for the year. This can be easily found by calling your banking institution or checking your MyAccount through the Canada Revenue Agency (CRA).

But once you have that cash there, what do you do with it? You could create a passive-income stream that could set you up for life.

Just start

The best thing to do if you’re looking to create long-term passive income through investing is just start. It doesn’t have to be some crazy, well-thought-out plan. Instead, there are many options for new investors to simply go through their bank, put in their goals and how conservative or risky they want to be, and come up with options!

However, for the sake of this article, we’re going to look at strong passive-income stocks that could provide monthly passive income in the future. One great option is Northland Power (TSX:NPI). Northland stock provides a monthly dividend but is also in the renewable energy sector. Here, it offers a diverse portfolio of renewable energy options but has been struggling slightly as of late.

Northland stock has short-term issues where it is currently fixing its wind farms on the east coast. This has led to lower revenue, coupled with issues surrounding inflation and interest rates. But this makes it a great opportunity for investors who want a deal.

But start small

Before you go putting your life savings into this stock, there are certainly things you want to check on the way. First off, have your debts paid and an emergency fund on hand. Then put some of your cash into a Guaranteed Investment Certificate (GIC) for long-term, secure increases through interest.

From there, come up with a number you can invest month after month over the next decade or so. Let’s say that’s $500 each month from your paycheque. This would create $6,000 per year to invest! And that adds up to quite a lot.

So, if we’re looking at Northland Power stock, it currently has a dividend yield at 4.77%, coming out at $1.20 per share annually. It trades at 14.99 times earnings, making it valuable. It also has a compound annual growth rate (CAGR) of 6% in the last decade and CAGR of 1.05% for its dividend.

Adding it up

Using this information, we can see how much you could earn over the next decade to work towards your monthly passive-income goals. Over 10 years, that would mean investing $60,000. So, let’s see how much you could earn in that time, reinvesting dividends until the 10 years are up.

Year Share Price Shares Dividend Price Dividend Income Annual Contribution New Share Price New Shares Purchased Total Shares Portfolio Total
1 $26 230 $1.20 $276.92 $6,000 $27.56 227 457 $12,615.72
2 $27.56 457 $1.22 $557.54 $6,000 $29.21 224 681 $19,906.51
3 $29.21 681 $1.24 $844.44 $6,000 $30.97 221 902 $27,935.01
4 $30.97 902 $1.25 $1,127.50 $6,000 $32.82 217 1,119 $36,731.14
5 $32.82 1,119 $1.27 $1,421.13 $6,000 $34.79 213 1,332 $46,351.14
6 $34.79 1,332 $1.29 $1,718.28 $6,000 $36.88 209 1,541 $56,842.44
7 $36.88 1,541 $1.31 $2,018.71 $6,000 $39.09 205 1,746 $68,256.40
8 $39.094 1,746 $1.33 $2,322.18 $6,000 $41.44 200 1,946 $80,642.24
9 $41.44 1,946 $1.35 $2,627.10 $6,000 $43.93 196 2,142 $94,114.88
10 $43.93 2,142 $1.37 $2,934.54 $6,000 $46.56 192 2,334 $108,671.04

By the end of the 10th year, you would be bringing in annual income of $2,934.54, and have a portfolio worth $108,671! That’s returns of $48,671.04, and monthly passive income of $244.55 from your annual $6,000 investment. So, as I said, just start.