If you like earning passive income but don’t like paying tax, the TFSA (Tax-Free Savings Account) is the place you should be investing. Any opportunity you can get to invest, earn income (capital gains, interest, and dividends), and pay no tax is one you should capitalize on.
Paying tax on income can reduce your annual returns by as much as 10-20%. Fortunately, the TFSA is an excellent place to compound passive income.
Use your TFSA to reduce your taxes and grow your net worth
By keeping all your dividends and interest, you can take those returns and re-invest them into more investments. By holding more investments (like dividend stocks), you can earn more income and then buy more stocks. It starts to snowball quickly.
If you are looking to earn an average of about $250 of tax-free passive income per month, this mini TFSA income portfolio below would generate just under $250 per month of average income. The great news is all these stocks are dividend growers, so there is income upside from here as well.
A top TFSA energy infrastructure stock
If you put $20,000 of TFSA cash to work in Pembina Pipeline (TSX:PPL), you would be able to buy 447 shares at today’s price of $44.72. With a dividend yield of 5.98%, that would earn $298.38 every quarter, or $99.45 averaged monthly.
Pembina is one of Canada’s largest energy infrastructure companies. It is a great way to get exposure to the energy sector but with more safety and less commodity risk. Over 85% of Pembina’s earnings come from contracted operations. These contracted operations largely support the dividend payout.
It has its targets on some big future growth projects (LNG, pipeline expansions), but it is being very patient for the right opportunity. Fortunately, the dividend is attractive. Investors can afford to be patient to see that growth come to pass.
A high-quality real estate stock
With $20,000 of TFSA cash, you could buy 285 units of Granite Real Estate Investment Trust (TSX:GRT.UN) at a price of $70. With a 4.6% distribution yield, that would earn $76 per month of tax-free income.
Granite is one of Canada’s largest industrial real estate businesses. It owns large modern logistics and manufacturing facilities across Canada, the U.S., and Europe. Its average lease term is 6.5 years, so its rental profile is very secure. Most of these have annual contracted CPI-indexed rent increases.
Granite has one of the best balance sheets in the real estate sector. It has consistently increased its dividend annually for 13 consecutive years. For a very conservative way to get exposure to real estate (and earn some nice income in your TFSA), Granite is at a great price and value today.
A safe utility stock
Another safe bet for a TFSA is Fortis (TSX:FTS). A $20,000 investment would buy you 353 shares at a price of $56.50. With a 4.2% yield, you would earn $208.27 quarterly, or $69.42 averaged monthly.
Fortis is a low-risk stock with its highly regulated business of transmission and distribution utilities. Everyone needs electricity and gas for everyday modern survival, so Fortis generates very consistent earnings.
The company is investing in low-risk projects that it hopes will deliver 5% average annual growth for the next five years. The company expects to grow its dividend annually in the 4-6% range. It has 50 years of dividend growth behind it, so it has an excellent track record backing its future performance.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Pembina Pipeline | $44.72 | 447 | $0.6675 | $298.38 | Quarterly |
| Granite REIT | $70 | 285 | $0.2667 | $76.00 | Monthly |
| Fortis | $56.50 | 353 | $0.59 | $208.27 | Quarterly |