How to Use a TFSA to Bring in $1,000 a Month Completely Tax-Free

The TFSA (Tax-Free Savings Account) is the perfect place to invest in stocks that generate income. Any income (interest, dividends, or capital gains) earned in the account is completely tax-free. You don’t get taxed when you earn the income, and you don’t get taxed when you withdraw from the account.

As long as you follow the rules, it can be one of the most profitable registered accounts. The exciting thing is that over time, your income can actually grow into something substantial.

How to turn a $109,000 TFSA into $278,0000

Let’s say you are starting with the maxed-out contribution limit of $109,000 to invest in your TFSA. You could find a mix of stocks that collectively pay a 4% dividend and enjoy 5% stock appreciation every year. That equals around an 9% annualized total return. That is not far from a market rate of return.

If you invested that way for 12 years, and reinvested all your quarterly and monthly dividends (a total of $64,153 collected in dividends), your TFSA portfolio would be worth over $278,000! You could hit that value in fewer than eight years if you also regularly add your TFSA contribution limit.

How to start enjoying your TFSA income stream

At that point in time, you might say now it is time to stop reinvesting and just enjoy the income you earned. If you wanted to earn $1,000 of income averaged monthly ($12,000 per year), you would only need to collect an average dividend yield of around 4.3% to hit your target.

The point is that if you can be disciplined and let your TFSA compound over time, you can end up with a portfolio of scale that can begin supplementing your income. You don’t need to be a portfolio superstar to achieve this.

Generally, a steady market rate of total returns (8-10%) will do. What you most need is a bit of time and a lot of patience. Once your portfolio grows to a sustainable level, you can then start to think about harvesting your returns.

Fortis

Fortis (TSX:FTS) is a perfect example of this. Its business is plain vanilla. It operates nine regulated utilities across North America.

It isn’t the fastest-growing company, but it has delivered 6.5% compounded annual stock returns over the past 10 years. When you add in the dividends compounded, those annual total returns look more like 10.6% compounded annually over that period.

Fortis has 52 years of consecutive dividend growth. So, even though its yield is only 3.3% today, your yield on cost will rise as it targets 4-6% annual dividend growth over the coming five years.

Pembina Pipeline

If you want something closer to that 4.3% yield, you could look at Pembina Pipeline (TSX:PPL). It yields 4.6% today. It just raised its dividend by 3.5%, which is its fifth consecutive increase since 2021.

Pembina is a steady utility-like business. It offers crucial infrastructure to the Western Canadian energy industry. Over 85% of its income is contracted today, so you have a steady income stream supporting its dividend.

Pembina stock is up 72% in the past 10 years for a 5.6% compounded annual growth rate (CAGR). However, add in dividends, and it has delivered a 201% total return for an 11.7% CAGR.

A hypothetical $278,000 invested in Pembina stock would earn approximately $3,200 every quarter or $1,065 averaged monthly.

The Foolish takeaway

If you find a mix of stocks like Pembina and Fortis, you may not hit the jackpot with some quick returns. However, slow and steady compounding of dividends and capital gains tax-free in a TFSA can still return significant and substantial benefits if you are patient with the process.