How to Turn a $7,000 TFSA Contribution Into $7,000 in Passive Income

dividends grow over time
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Written by Amy Legate-Wolfe at The Motley Fool Canada

Passive income isn’t something that comes from dividend income alone. Yet that remains what investors focus on these days. I get it. We’re looking for easy income during this bear market, and dividend income looks like a sure thing. However, it really isn’t.

Any company can turn around and cut its dividend. If you want fixed income, then you need to look at something like a Guaranteed Investment Certificate (GIC). Granted, those are great right now. But for longer-term investments in stocks, I would recommend looking at both dividends and returns.

Do this, and you could turn even $7,000 into $7,000 in passive income in a fairly short period.

Get into your TFSA

The Tax-Free Savings Account (TFSA) looks like it will have an additional $7,000 in contribution room as of Jan. 1, 2024. That $7,000 can be used to pick up some pretty solid and stable investments these days — ones that could provide a surge in passive income from both dividends and returns.

Yet if you’re looking to take it out right away, that’s on you. If it were me, I would use the dividend income coming my way and reinvest back in a stable stock again and again. Should you do this, investors should be able to create a passive income of $7,000 in no time. All it takes is a combination of dividend income and returns.

Find a stock with both

You’ll want to find a stable stock that’s going to see you on the other side of this bear market. A perfect choice for me would be to consider finance stocks, specifically the Big Six banks. These Canadian banks enjoy an oligopoly on the market, as there are only a few that Canadians can choose from.

Because of this, Canadian banks have a lot of cash set aside for provisions against loan losses. That’s why they’ve been able to bounce back from recessions, downturns, and even a pandemic within a year of hitting 52-week lows.

Among them all, for secure and growing income, I would look at Bank of Montreal (TSX:BMO). BMO stock offers growth through its ever-growing exchange-traded funds (ETF) options, as well as its acquisition of Bank of the West. It’s also quite valuable, trading at 10.64 times earnings, and holding a 5.48% dividend yield.

Creating $7K

If you’re looking to turn that $7,000 into $7,000 in passive income, let’s look at how long that might take. You’ll need to consider BMO stock’s compound annual growth rate (CAGR) in both returns and dividends. BMO stock holds a 4% CAGR in returns and 7.5% CAGR in dividends. So, let’s look at how long it would take with dividends reinvested.

Year

Share Price

Shares Owned

Share Value

Annual Dividend Per Share

Annual Dividend

After DRIP Value

Annual Contribution

Year End Stock Price

New Shares Purchased

Year End Shares Owned

New Balance

1

$108.00

65.00

$7,020.00

$5.88

$382.20

$7,402.20

$0.00

$112.32

3.00

68.00

$7,637.76

2

$112.32

68.00

$7,637.76

$6.32

$429.76

$8,067.52

$0.00

$116.81

4.00

72.00

$8,410.32

3

$116.81

72.00

$8,410.52

$6.80

$489.60

$8,900.12

$0.00

$121.49

4.00

76.00

$9,233.24

4

$121.49

76.00

$9,232.88

$7.30

$554.80

$9,787.68

$0.00

$126.34

4.00

80.00

$10,107.20

5

$126.34

80.00

$10,107.58

$7.85

$628.00

$10,735.58

$0.00

$131.40

5.00

85.00

$11,169.00

6

$131.40

85.00

$11,168.87

$8.44

$717.40

$11,886.27

$0.00

$136.65

5.00

90.00

$12,298.50

7

$136.65

90.00

$12,298.90

$9.07

$816.30

$13,115.20

$0.00

$142.12

6.00

96.00

$13,643.52

By year eight, you would now have a portfolio worth $13,643.52. However, with dividends included, that turns into a total of $14,580.54! You’ve now created passive income at a total of $7,580.54 in under eight years! And that’s without adding more than that original $7,000 of your own money.

The post How to Turn a $7,000 TFSA Contribution Into $7,000 in Passive Income appeared first on The Motley Fool Canada.

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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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