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Motley Fool investors should already know the biggest and best key to becoming wealthy: long-term investing. While that is certainly true, it’s only when coupled with strong portfolio choices that you make the most of your long-term investments. And a big part of that is the Tax-Free Savings Account (TFSA) and passive income.
Since 2009, Canadians have been given contribution room each and every year for tax-free income. The TFSA now has a contribution limit of $81,500. As long as you follow the rules, you can turn that $81,500 into incredible tax-free passive income. In fact, in just a decade, you could have $100,000 in returns.
The key strategies
Let’s just assume you have a TFSA with the full $81,500 available. Now, I’m definitely not going to recommend you put everything in one stock. But for the sake of this example, we’ll use a good chunk of that TFSA room to put towards a passive-income choice.
The first thing you want to do is find the best bang for your buck. That means finding a passive-income stock that will continue to pay out no matter what happens. And one of the best choices has to be the Big Six banks. These Canadians stocks rebounded after each and every economic downturn within a year. Further, they haven’t missed a dividend payment in their company’s history.
Once you have your option, you need to then invest and take on the next huge benefit to your TFSA: reinvestment. Take those dividends and reinvest in your Big Six bank to continue growing your TFSA even further. You can do this automatically by creating automated contributions, so you can just sit back and watch it grow.
For passive income for a Motley Fool investor’s TFSA, I have to recommend Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM). The Big Six bank is the highest dividend of the top banks, with a yield of 3.9%. That means you’re receiving $6.44 per share per year from the stock. And the company recently just increased its dividend and likely will again this year. That comes after a dividend freeze for the Big Six banks.
CIBC stock is also a steal, trading at 11.74 times earnings. Yes, it’s at all-time highs. But let’s zoom out. over the last two decades, shares have climbed 213%! That’s a compound annual growth rate of 5.88%. So, if you count on that for the next decade, here’s how you can achieve $100,000 in returns.
If you were to invest $65,200 today, that would give you 400 shares of CIBC stock. That would immediately create passive income of $2,576 each year — not bad already. But if you then see the same amount of share return at 5.88%, and dividends continue to rise at around 7%, you’ll see massive returns. In fact, after only a decade, you could have a portfolio worth $174,008. That’s returns of $108,808 in just a decade!
Yes, $65,200 is certainly a lot to invest in one stock. And I’m definitely not saying you should put everything you have in CIBC stock. However, this goes to show it is absolutely possible to make $100,000 in a decade by simply making one strong investment and reinvesting dividends.