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2 Top TFSA Picks for Retirees

Low interest rates on GICs are causing grief for seniors who need investment income to supplement their pension checks. As a result, many retirees are turning to dividend stocks as a way to get decent returns, but the taxman often takes a nice chunk of the earnings and gains.

One way pensioners can keep the distributions in their pockets instead of sharing them with the CRA is to buy the stocks inside a tax-free savings account (TFSA).

Here are the reasons why I think Fortis Inc. (TSX:FTS) and Bank of Montreal (TSX:BMO)(NYSE:BMO) are good picks right now.

Fortis Inc.

Fortis owns and operates electricity generation and natural gas distribution assets located in Canada, the U.S., and the Caribbean. This gives it a balanced footprint across geographic regions as well as exposure to different currencies. The U.S. has become a much larger part of the asset mix in the past few years.

Fortis paid US$4.3 billion in 2014 to acquire Arizona-based UNS Energy. The deal is already accretive and provides a great way to benefit from the strength in the U.S. dollar. This came on the heels of a smaller US$1.5 billion deal completed in 2013 for assets located in Vermont.

Here at home, the company just wrapped up an expansion at is hydroelectric facility in British Columbia, and that is also generating a nice revenue stream.

Pensioners can rely on Fortis for consistent and predictable cash flow because 93% of the revenues come from regulated assets—a big reason why the company has increased its dividend every year for more than four decades.

That’s the kind of stability retirees need when picking a dividend stock for income. Fortis pays a distribution of $1.36 per share that yields about 3.7%.

Bank of Montreal

A long history of dividend payments is normally a good indication the distributions will continue. In Canada, there is no company with a better track record than Bank of Montreal. In fact, Canada’s oldest bank has paid a dividend to its investors every year since 1829.

With the Canadian economy working its way through some tough times, it is important to own financial stocks with revenue coming from other regions. Bank of Montreal offers that through its 600 branches based in the U.S. Midwest.

As with Fortis, investors are getting a nice boost when U.S.-based earnings convert back to Canadian dollars.

In its latest quarterly statement, Bank of Montreal said the U.S. group accounted for 18% of total earnings. Profits from the American operations increased by 36% compared with the same period last year.

Bank of Montreal only has 2% of its total loan portfolio exposed to the energy sector, and 60% of its Canadian mortgage holdings are insured. The loan-to-value ratio on the remaining loans is reasonable at 58%.

The stock is cheap right now, trading at just 10 times forward earnings, and investors get a nice 4.6% dividend yield. Management is quite conservative with the company’s funds, so the dividend looks very safe.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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