Passive Income: How to Make $385 Per Month Tax Free

A market correction in the top TSX dividend stocks is giving Canadian investors the opportunity to buy large, high-yielding stocks within their Tax-Free Savings Account (TFSA) to generate a steady and growing stream of income. passive income.

TFSA 101

The government launched the TFSA in 2009 as an additional savings tool to go along with the Registered Retirement Savings Plan (RRSP). A TFSA is more flexible than an RRSP because funds can be withdrawn at any time without penalty or amounts being withheld for taxes. Additionally, the amount withdrawn from a TFSA opens up new contribution space in the following calendar year.

All interest, dividends, and capital gains within the TFSA can be taken as tax-free income. In addition, TFSA earnings are not used by the Canada Revenue Agency when calculating net worldwide income that determines the Old Age Security (OAS) pension recovery tax. A 15% recovery tax is imposed on OAS recipients if their net worldwide income exceeds a minimum threshold.

The TFSA limit for 2023 is $6,500, bringing the maximum cumulative contribution space to $88,000 for anyone eligible each year since the program began.

A wide range of investments can be held within a TFSA. High-yield dividend stocks and Guaranteed Investment Certificates (GICs) are now popular for generating passive income. Stock prices can be volatile, so it makes sense to look for top stocks with a consistent track record of dividend growth when building a TFSA fund focused on passive income.

Telus

Telus (TSX:T) typically increases its dividend by 7-10% per year. The company has raised payouts 24 times since spring 2011.

Telus derives most of its revenue from mobile and internet subscription fees. These are essential communication services that businesses and households need, regardless of economic conditions. That means the revenue stream should remain stable during a recession.

Telus expects operating income to grow 11-14% in 2023. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) is projected to increase 9.5-11%. It is a strong guide in challenging macroeconomic conditions.

Despite the positive outlook, Telus’s stock fell to less than $26 per share compared to more than $34 at its peak last year. The drawdown looks excessive, and investors can get a 5.6% dividend yield.

CIBC

CIBC (TSX:CM) raised its dividend when the bank reported fiscal second-quarter (Q2) 2023 results. The increase in distribution is a signal to investors that the management team is comfortable with the revenue and earnings outlook for the coming quarters.

CIBC’s stock trades below $57 at the time of writing compared to above $80 in early 2022. The decline is due to recession fears. The Bank of Canada and the Federal Reserve of the United States have aggressively raised interest rates in an effort to cool down an overheated economy and restore employment balance, while they are trying to lower the rate of inflation. Increasing rates takes time to work through the system, and there is a risk that central banks could push the economy into a deep recession.

A big jump in mortgage costs combined with a potential wave of job losses could cause a spike in loan losses for Canadian banks. CIBC has a large Canadian residential mortgage portfolio relative to its size, so the bank could potentially take a big hit if mortgage defaults spike and home prices fall.

Currently, most economists are predicting a mild and short recession. Housing demand remains strong, and supply is constrained. Record levels of immigration are expected to put a floor under any weakness in the Canadian housing market over the next few years.

Investors who buy CIBC at the current share price will get a 6.1% yield.

The bottom line of passive income in a TFSA

Telus and CIBC are good examples of high-yield dividend stocks that should continue to increase their distributions. TFSA investors can now combine a diversified portfolio of dividend stocks and GICs to earn a minimum yield of 5.25%. This will generate $4,620 per year in a TFSA of $88,000.

That works out to an average of $385 per month in tax-free passive income!