Increasing Cash Flow with TFSAs
The recent increase in the contribution limit makes Tax-Free Savings Accounts a more attractive option for cash flow.
Until now, no one has paid much attention to the idea of using Tax-Free Savings Accounts to generate income. But the increase in the contribution limit to $10,000 changes that.
Since the increase is effective immediately, it means that everyone who was 18 or older when the plans came into effect at the beginning of 2009 now has accumulated contribution room of $41,000, or $82,000 for a couple. That’s not sufficient capital to live on but it’s enough to generate a few thousand dollars a year in extra (tax-free) income to supplement other sources.
How much? Using a target return of 5 per cent (which is quite doable as we’ll see in a moment), a couple that has contributed the maximum amount could generate about $4,100 in extra cash flow this year. If both contribute the new maximum at the start of 2016, that would increase the cash flow to around $5,100. Assuming the new limit remains in place (the Liberals have said they would drop it back to $5,000 if elected), it won’t take long for TFSAs to become a major potential income source.
BCE Inc. (TSX, NYSE: BNS). This telecommunications giant needs no introduction. It’s been on our list since July 2012 when it was recommended at $41.98. It was recently trading at C$53.50, US$44.28 and pays an annual dividend of $2.60 a share to yield 4.86 per cent. We will buy 75 shares for a cost of $4,012.50.
Bank of Nova Scotia (TSE, NYSE: BNS). It’s important to have stability in a portfolio such as this and a major bank stock helps provide that. We originally recommended Scotiabank in August 2007 at $50.98. It closed on May 8 at C$65.41, US$54.10. The annual dividend is $2.72 to yield 4.16 per cent. We will buy 60 shares for an investment of $3,924.60.
Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP). This Bermuda-based limited partnership is a spin-off from Brookfield Asset Management, which owns a majority stake. It invests in a wide range of infrastructure projects in stable countries such as Australia, Brazil, Great Britain, Canada, and the U.S. It was added to our list in September 2010 at C$18.90, US$18.38. The shares now trade at C$54.18, US$44.87 and pay an annualized distribution of US$2.12 to yield 4.72 per cent. We will purchase 75 shares at C$54.18 for an investment of $4,063.50.
Brookfield Renewable Energy Partners (TSX: BEP.UN, NYSE: BEP). This is another Brookfield spin-off, but with a focus on renewable energy – mainly hydro but also some wind projects. It was originally recommended in July 2009 at C$16.62, US$15.50. It now trades at C$38.15, US$31.71 with an annualized distribution of US$1.66 to yield 5.23 per cent. We are buying 105 shares for a total cost of $4,005.75.
Inter Pipeline (TSX: IPL, OTC: IPPLF). This has been a first-rate performer for us since it was recommended in October 2009 when it was recommended at C$9.99, US$9.62. Since that time we have enjoyed a capital gain of more than 200 per cent and eight dividend increases. The stock now pays $1.47 annually to yield 4.83 per cent. The recent price on the TSX was $30.45. We will buy 135 shares at a cost of $4,110.75.
North West Company (TSX: NWC, OTC: NWTUF). Talk about a dull company! Apart from its historic name, this Winnipeg-based firm has nothing to excite investors except for a solid, steady business and dependable cash flow. That’s just what this portfolio needs. The stock was recommended in April 2007 at C$18.83, US$16.65. The current dividend is $1.16 to yield 4.71 per cent on a TSX price of $24.64. We are buying 165 shares at a cost of $4,065.60.
Here is the full portfolio. I have used $41,000 as the inception value, which is the maximum cumulative individual contribution to a TFSA at this time.
TFSA Income Portfolio (a/o May 8, 2015)
|Security||Weightper cent||TotalShares||AveragePrice||BookValue||Dividend||Yieldper cent|
Based on the current dividends/distributions, this portfolio will generate cash flow of $2,178.39 over the next 12 months, which works out to a yield of 5.3 per cent. I will update it at the six-month anniversary in November.