A Tax-Free Savings Account (TFSA) is an invaluable tool for Canadians who want to build wealth without the burden of paying taxes on their investment returns. Introduced in 2009, the TFSA has quickly become one of Canada’s most popular financial accounts. For 2024, the contribution limit is set at $7,000. What makes a TFSA so powerful is that any income generated inside it can be withdrawn tax-free, thus making it an ideal tool for creating long-term, tax-free income.
The benefits
When it comes to maximizing the potential of a TFSA, dividend-paying stocks stand out as a prime option, especially for those looking to create passive income. Dividends earned within a TFSA aren’t subject to the usual tax penalties. So they can accumulate and be reinvested to generate even more income, all tax-free. But, where to invest?
A stock to consider
Brookfield Asset Management (TSX:BAM) is a compelling example of a dividend stock that fits perfectly within a TFSA strategy. As a global asset management company, BAM focuses on sectors such as renewable energy, infrastructure, private equity, and real estate, thus making it well-positioned for both growth and income.
Currently, BAM’s dividend yield is around 2.9%, with an annual dividend of approximately $1.52 per share. While this yield might not seem especially high at first glance, BAM’s history of consistent dividend payments and capital growth potential make it a strong candidate for a TFSA investment.
Into earnings
In BAM’s recent third-quarter report for 2024, the company announced record results, with fee-related earnings up by 14% year-over-year to $644 million. This robust increase was driven by strong fundraising efforts and strategic partnerships, which boosted their fee-bearing capital by 23%, reaching a substantial $539 billion. This growth in fee-bearing capital indicates the company’s expanding base of income-generating assets, providing a steady and predictable income stream.
A recent strategic initiative by Brookfield further demonstrates its growth potential. In October 2024, BAM announced a partnership with Ørsted to acquire a 12.5% stake in four operational offshore wind farms in the U.K., with a combined capacity of 3.5 gigawatts. This move enhances its asset base in an increasingly profitable sector.
Furthermore, Brookfield’s stock has also shown resilience and growth over time. Over the years, BAM stock has shown a pattern of steady capital appreciation, and its diverse revenue streams reduce the risk associated with any single market downturn.
Looking ahead
For those holding BAM shares within a TFSA, the benefits are magnified. Since all income within a TFSA is tax-free, BAM’s dividends can be reinvested entirely without any tax drag, allowing for compounding to work more effectively. Plus, any capital gains earned if BAM shares appreciate in value can be realized tax-free upon withdrawal. This combination of dividend income and growth potential makes BAM an ideal fit for investors aiming to build wealth in a TFSA over time.
BAM’s future outlook is also promising. The company is strategically expanding in sectors like energy transition, artificial intelligence (AI) infrastructure, and private credit, areas with considerable growth potential. These initiatives place BAM in a strong position to capitalize on emerging market trends, which should bolster its income and investor returns in the coming years.
Bottom line
A TFSA is arguably the best vehicle for Canadians looking to build tax-free wealth. Its flexibility, combined with the tax-free status of income and withdrawals, makes it uniquely suited for both short- and long-term goals. When looking for the right investments to hold within a TFSA, dividend stocks like Brookfield Asset Management stand out.
BAM offers consistent dividends, strategic growth in future-facing sectors, and solid past performance. Plus both have current income and capital appreciation potential, all of which can be enjoyed tax-free within a TFSA. For Canadians looking to harness the power of compounding without the drag of taxes, investing in BAM through a TFSA is a move that promises both stability and growth potential.
