Canadians who were born in 1991 or earlier can contribute an accumulated total of $109,000 to their Tax-Free Savings Account (TFSA). That is a substantial sum that can be invested and earn income completely tax-free!
Buy the Index
If you wanted a very simple portfolio, you could just buy the TSX Index. The iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC) earns a 2% yield today. A $109,000 investment in just the XIC ETF would earn you $538 quarterly or $179 averaged monthly.
The cash return is certainly humble. However, it comes with modest risk and you don’t need to do any work for your returns. If history is a guide, you will see your capital grow by around 8.5% on average, so there is nothing wrong with that.
Buy a high dividend ETF for your TFSA
If you wanted to boost your income returns, you could buy the iShares Core S&P/TSX High Dividend Index (TSX:XEI). It owns 81 of the largest dividend-paying stocks in Canada. Since the portfolio is so extremely diversified, you only earn a dividend yield of 3.4%.
Unlike the XIC, this ETF pays its dividends monthly. A $109,000 investment in your TFSA would earn $296 every single month. It has, in fact, earned a return that is superior to the XIC over time.
Average annual returns have been closer to 9.5% on average. For a combination of income and capital growth, this is a decent option.
Own stocks in your TFSA for a higher dividend yield
However, you may be interested in earning an even higher yield than 3.4%. That is certainly possible, but you would need to contemplate building your own portfolio of stocks. In fact, a 5% average portfolio yield is very possible. A 5% yield on a $109,000 TFSA would earn ~$454 on average monthly.
If I was looking for some stocks that could hit that target yield, here are two I would consider for my TFSA.
Enbridge
Enbridge (TSX:ENB) is currently yielding 5.5% today. Its stock recently pulled back, presenting a potential buying opportunity. Enbridge is one of the largest infrastructure players in North America.
Close to 20% of the oil produced in North America runs through its network! Most of its income, 98%, is contracted or regulated, making its earnings stream relatively steady. It has a quality mix of assets that are near impossible to replace.
The biggest risk for Enbridge is a large debt burden that is used to fund its substantial capital growth pipeline. This is a key area to analyze before purchasing the stock. If interest rates are to rise, there could be some additional downside in the stock.
Dream Industrial
Dream Industrial Real Estate Investment Trust (TSX:DIR.UN) yields 5.1% today. Like Enbridge, this stock has also pulled back recently.
Dream operates a large portfolio of quality industrial, warehouse, and logistics properties across Canada, the U.S., and Europe. The REIT has around 94% occupancy, which is a tad low. However, the REIT believes it can enjoy double digit rental rate increases on new leases and renewals. That should support an attractive organic growth profile.
With a solid balance sheet and a declining payout ratio, it just raised its dividend for the first time in several years. This is an interesting stock to add to a TFSA if you are interested in owning real estate as an investment vehicle.