$6,000 is how much contribution room TFSA account holders got in 2019. Although contribution space accumulates and you can use room from past years, the aforementioned figure goes to show how limited you are in terms of your ability to put money into the account. As of this year, the maximum amount of accumulated contribution space you can have is $63,500. However, if you were younger than 19 in 2009, your cumulative space will be much lower.
In light of this, you might imagine that it will be hard to generate significant TFSA assets. However, you only need to make it to $150,000 in assets to generate $6,000 a year in income at an average yield of 4% per year.
Because of the TFSA contribution limit, you’ll need to generate some returns before you can hit $150,000 in the account. Fortunately, there is a good shortcut that can get you there earlier than you’d think.
Use growth stocks to build your assets Getting to $150,000 with blue-chip dividend stocks is going to take a while. If you put in $63,500 this year, your assets will need to more than double, and it takes 7.2 years to double your money at 10% a year. For this reason, you’ll want to start off your TFSA journey with growth stocks that have the potential for capital appreciation.
LightSpeed POS is one growth stock that could have gotten you near $150,000 with a $63,500 starting balance. Up 125% since its March IPO, it would have turned $63,500 into $142,000. That’s a significant gain. What’s more, with Lightspeed growing its revenue at 36% year over year, it stands a reasonable chance of keeping it up. Should Lightspeed’s frothy gains continue, then it will prove to have been an excellent stock for ramping up assets quickly.
Using growth stocks like Lightspeed, you could potentially increase your TFSA holdings very quickly. Once you’ve built a balance you’re comfortable with, it’s time to move to phase two of the plan.
Use dividend stocks to generate income Growth stocks are riskier than blue-chip dividend payers, and holding them past the point where you’ve reached your savings goal isn’t recommended.
Once you’ve hit your goal, it’s a good idea to get into dividend stocks that pay you income for life. To reiterate, all it takes is $150,000 to get to $6,000 a year at a 4% yield. That’s a nice income supplement to bolster your CPP or RRSP payments.
Here, stocks like Canadian National Railway can be your best friend. Although CNR’s 1.8% yield is a little shy of 4%, the company reliably increases its dividend by about 14% a year.
You could always buy a stock like CIBC that yields over 4% now, but I prefer CN Railway because it consistently posts high earnings growth figures while having a high ROE. With CNR stock and a few years ahead of you, you could easily see your yield on cost grow higher than 4% — and get a nice return on your shares along the way. This would be an excellent way to get to $6,000 in annual TFSA income while also watching your assets grow.
Fool contributor Andrew Button owns shares of Canadian National Railway. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway and Lightspeed POS Inc. Canadian National Railway is a recommendation of Stock Advisor Canada.
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