Picture your TFSA (Tax-Free Savings Account) as a small rental property, but the proceeds are exempt from Canada Revenue Agency taxes. Now picture the rental income growing every year, which enhances the yield-at-cost over time.
One low-cost way to create a steady and growing passive income stream in the TFSA is to own quality dividend stocks such as Brookfield Infrastructure Partners (TSX: BIP.UN).
Valued at a market cap of $23.5 billion, BIP stock has returned 186% to shareholders over the past decade, after accounting for dividend reinvestments.
Why does Brookfield Infrastructure suit a TFSA?
A TFSA lets your investment income grow and be withdrawn tax-free, making it an ideal account to own quality dividend stocks. Brookfield owns a widening portfolio of cash-generating assets which includes railroads, utilities, and data centres in 15 countries.
A robust business model has allowed Brookfield to grow its distribution for 17 consecutive years, at an average annual rate of 9%.
In the second quarter, Brookfield Infrastructure reported FFO (funds from operations) of US$702 million, or US$0.89 per unit, an increase of 10% year over year.
In Q2, the company reported a payout ratio of 65%, which allows it to lower balance sheet debt, target accretive acquisitions, and consistently raise dividends.
BIP ended Q2 with US$2.6 billion in liquidity and carries a BBB+ investment-grade credit rating.
What is driving growth now?
Chief Executive Sam Pollock told investors that growth per unit averaged about 7% from 2023 to 2025. In 2026, FFO growth is closer to 10% for three reasons.
Most of the company’s revenue is tied to inflation. Pollock explained:
There’s no better asset class, no better stock to own than BIP because almost all our revenues are indexed to inflation.
Second, the company has deployed capital in projects that generate significant returns. It expects to invest more than US$2 billion this year and targets returns of 15% or better.
Third, it sells mature assets and reinvests the cash. It has already lined up about US$1.4 billion in sales this year, aiming for more than US$2 billion by the end of 2026.
Brookfield expects AI to be a key driver of growth, which includes data centres and power supply, backed by long-term contracts with high-quality customers.
What about the corporate simplification?
Brookfield Infrastructure is combining its two listed securities, BIP.UN and BIPC, into one corporation called Brookfield Infrastructure Partners Inc.
On October 14, BIP unitholders voted to approve the plan. A court hearing was scheduled for October 19, and the BIPC shareholder vote has been pushed to October 29.
Management says one simple security should be easier to own, trade more often, and attract passive investments via index funds.
It also expects the move to be tax-deferred for Canadian and U.S. investors with no meaningful cost to the business.
Is BIP stock undervalued?
Brookfield Infrastructure uses debt to fund its projects, so interest rate hikes can impact profitability. Large AI projects can take years to pay off, and local pushback against data centres is gaining momentum.
Analysts tracking BIP stock forecast adjusted funds from operations to increase from US$2.48 in 2025 to US$4.10 in 2029. If the TSX dividend stock is priced at 12 times forward FFO, which is reasonable, it could surge 30% over the next two years.
If we adjust for dividends, cumulative returns could be closer to 40%.