Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances.
Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities.
Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. Amy’s work can be found regularly on the Financial Post and MoneyWise Canada.
When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog Finley, and travel.
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|More on: TUT
We could all use some extra cash right about now. The stock market may have recovered, but another market crash could certainly be on the way. That means finding stable dividend stocks during this volatile period is practically essential.
Lockdowns continue to happen across the country, and the world. This means businesses are likely to see another downturn similar to the beginning of the pandemic. Investors should be on guard for another market crash and looking for stable income. There are a number of dividend stocks out there, but not all are created equal. So if you want to bring in $400 per month, it’s going to take two things. First, a stock that will continue payouts. Second, a fairly large investment.
Consider Telus
There are a number of telecommunications companies out there, butTELUS Corp. (TSX:T)(NYSE:TU) has been at the top lately. That comes down to the company getting ahead of the 5G curve and installing wireline. Now, the company can look forward to bringing in revenue rather than dreading the huge investment.
It’s certainly been working. Many people reconsidered negotiating contracts during the work-from-home economy change. Telus managed to see revenue grow steadily even during the peaks of the pandemic. Most recently revenue rose 4.21% year over year.
Meanwhile, its share price is back at pre-crash levels. But during the last decade, it’s come up about 250%, for a compound annual growth rate (CAGR) of 25% during that time. And, of course, it offers a strong dividend of 4.69% as of writing.
Bring in that cash!
So if you want to bring in monthly income, it will take a fairly significant investment. Let’s say you were to use $70,000 of your Tax-Free Savings Account (TFSA) contribution room. That would bring in $3,297 in annual dividend income from this dividend stock as of writing. That would then equal $274.76 in monthly dividend income!
But let’s take this a step further. The company has continued to grow dividends each year over the last several years, by 8.19% in the last five years alone. So let’s say you were to take that cash and reinvest it until you really needed it. Now you can take that money and put it toward Telus again and again.
Why do this? You now have free cash to put towards the stock and grow an even bigger portfolio. Using the information above, you can figure out where Telus might be in another decade! In this example, we’ll assume it will continue to see share growth of 25%, and dividend growth of 8.19%. That means in another decade your $70,000 investment could be worth $819,441.71. That’s almost a million dollars in a decade!
Foolish takeaway
Yes, we could all use the cash that comes from monthly dividend stocks. But if you don’t need it right away, consider reinvesting that money. It certainly won’t hurt, and could make you a millionaire if you invest properly! The best part is you don’t have to invest in risky stocks. Instead, choose strong companies that will continue to be around paying those dividends for decades to come.
Please note that I can only provide you with general legal information here, not legal advice. There is no lawyer-and-client relationship established. No, income earned within the TFSA, such as dividends or interest, does not count towards your contribution limit.
If you have cash to put to work in a TFSA and adequate contribution room available, allocating a portion of it to dividend stocks can be a terrific way to grow your money. Between the tax-free dividend income, capital gains, and possible compounded growth, you can be a much wealthier investor when you retire.
However, this isn't always the case. If you're looking to generate $300 in super safe monthly dividend income (note the emphasis on "monthly" income), simply invest $43,000, split equally, into the following two ultra-high-yield stocks, which sport an average yield of 8.39%!
U.S. stocks held in a TFSA are subject to 15% withholding tax on U.S. dividend income. Withholding tax would apply to other foreign stocks held in a TFSA, with rates starting at 15%, depending on the country. Only Canadian stocks are not subject to withholding tax on their dividends inside a TFSA.
Let's say, for example, your TFSA contribution limit for 2023 is $8,000. You contribute $6,000 in March, leaving you with a contribution room of $2,000 for the rest of the year.
TFSA investors could consider Canadian Natural Resources (TSX:CNQ) stock for its ability to deliver solid capital gains and focus on returning higher dividends to its shareholders. This Canadian blue-chip stock has appreciated more than 269% in five years, delivering an impressive average annualized return of 29.8%.
For non-dividend U.S. stocks, holding them in TFSA could be a smart choice. Like Canadian stocks, you won't pay a capital gains tax on U.S. stocks when you sell them for a gain. And unlike RRSPs, you won't pay taxes when you withdraw money from your TFSA before retirement.
The truth is that most investors won't have the money to generate $1,000 per month in dividends; not at first, anyway. Even if you find a market-beating series of investments that average 3% annual yield, you would still need $400,000 in up-front capital to hit your targets.
That usually comes in quarterly, semi-annual or annual payments. Shares of public companies that split profits with shareholders by paying cash dividends yield between 2% and 6% a year. With that in mind, putting $250,000 into low-yielding dividend stocks or $83,333 into high-yielding shares will get your $500 a month.
Earning $2,000 in monthly passive income sounds unbelievable but is achievable through dividend investing. However, the investment amount required to produce the desired income is considerable. To make $2,000 in dividend income, the investment amount and rate of return must be $400,000 and 6%, respectively.
A TFSA isn't considered tax-free in the U.S., so U.S. persons must pay U.S. income taxes annually on the account's income and capital gains. Information disclosures are also necessary.
Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn. Administrative or other fees in relation to a TFSA and any interest on money borrowed to contribute to a TFSA are not tax-deductible.
Compensation for purposes of contributing to an IRA doesn't include earnings and profits from property, such as rental income, interest and dividend income, or any amount received as pension or annuity income, or as deferred compensation.
RRSP contribution room is calculated based on “earned income,” which includes salary but not dividend income. If your only source of income is dividend income, you won't be able to build RRSP contribution room.
Investment income earned by, and changes in the value of your TFSA investments will not affect your TFSA contribution room for current or future years.
No.Investment earnings, including dividends, are not considered taxable income. Distributions from your HSA that are used for qualified health care expenses are tax-free. Taxes, as well as an additional 20% tax may apply to non-qualified distributions.
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