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2 Great Dividend Stocks to Fill Your Expanded TFSA

The federal budget just handed investors a nice $4,500 gift.

Some people say the much-publicized hike to the tax-free savings account (TFSA) limit is an attempt to woo voters. Whether it will have an impact on election results is anyone’s guess, but the recently announced increase to the annual TFSA limit is great news for investors, especially those who are holding equities in a taxable trading account because their TFSAs are already full.

The limit has increased from $5,500 to $10,000 per year effective January 1, 2015.

How should investors use it?

There is an ongoing debate about the types of investments that should go into the TFSA. Some advisors argue that it should hold interest-bearing products because those earnings are taxed at the highest rate. That makes sense for people who can’t afford to take on any risk. Unfortunately, GICs pay very little interest right now.

If you have a bit of time on your investing horizon, there is a good case to be made for using the TFSA to hold dividend-paying stocks and then reinvest the distributions. This gives you a tax-free way to compound the dividends and protect any capital gains.

Here are the reasons why I think investors should consider Potash Corp./Saskatchewan Inc. (TSX:POT)(NYSE:POT) and Power Corporation of Canada (TSX:POW) for their TFSAs.

Potash Corp.

The global population currently stands at about 7.2 billion and that number is expected to be as high as 11 billion by 2050. At the same time, the amount of farmland available to grow crops continues to decline. This means farmers need to maximize production and the use of fertilizers is one way to do that.

Potash demand hit a record 61 million tonnes in 2014 and the outlook remains strong for 2015 and beyond. Investors in Potash Corp. are rubbing their hands together because the company is completing a series of big expansion projects and those facilities are going churn out a lot more production.

When a company wraps up a big capital program, cash flow available for distributions normally increases, and in this case, there is a double benefit because the increased output capacity should lead to higher revenues. If things are working as planned, production costs per tonne should also drop.

Potash pays a dividend of US$1.52 per share that yields about 4.6%.

Power Corporation

Power Corp. is a holding company with a basket of top-performing assets, including some of Canada’s best names in wealth management and insurance. The diversification provides a stable stream of revenues from a variety of asset groups and companies.

Earnings in 2014 hit $1.24 billion, or $2.69 per share, compared with $959 million, or $2.08 per share in 2013.

Concerns about Canada’s housing market have many investors wondering if now is the right time to be buying bank shares. Power Corp. gives investors a way to play the growth areas of the financial sector without taking on the retail mortgage risks.

The company pays a dividend of $1.16 per share that yields about 3.5%.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker owns shares of Potash Corp.

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