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TFSA Investors: 3 “Forever Stocks” to Provide Tax-Free Income for Life

There’s nothing like tax-free income.

And thanks to the Tax-Free Savings Account (TFSA) –Canada’s most flexible tax-exempt saving option — you can actually earn a surprising amount of it.

While Canadians normally pay taxes on dividends and capital gains, it’s possible to shelter your holdings with the help of a TFSA.

TFSA holdings are not only not taxed while inside the account, but they can also be withdrawn tax-free, making such accounts perfect for generating income you intend to spend.

By putting just a few thousand dollars a year into your TFSA, you can eventually build a nest egg that will pay you handsomely in dividends. With that in mind, here are three high-yield dividend stocks that can pay you beaucoups bucks inside your TFSA.

Fortis (TSX:FTS)(NYSE:FTS)

Fortis is a Canadian dividend investor’s favourite. A diversified utility with assets in Canada, the U.S., and the Caribbean, it pumps out solid income quarter after quarter. This company’s dividend history is legendary: with 45 consecutive years of dividend increases under its belt, it pays income that’s not only high, but rising. This stock’s current yield is 3.56%, and management aims for annual increases of about 6% per year.

Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN)

Algonquin Power & Utilities is another utility stock. Like Fortis, it owns a geographically diversified collection of utility assets across North America. Also like Fortis, it has a long track record of dividend increases. Algonquin’s current dividend yield is about 4.8%, which is higher than Fortis’s, although its payout ratio is also higher. On the flip side, Algonquin has much stronger historical capital gains than Fortis does: over the past five years, it has risen 93% to Fortis’s 53%.

TD Bank (TSX:TD)(NYSE:TD)

Last but not least, we have TD Bank. TD Bank has been one of Canada’s best bank stocks over the years, rising 320% since the bottom of the financial crisis (if you’d bought BEFORE the crisis, you’d have realized a gain of 114% by today). These returns absolutely thrash the TSX average, which has been abysmal over the past decade.

Why is the TD Bank such a strong stock?

There are several reasons.

First of all, it is famous for its conservative lending practices, which spare it the fate of too many defaults — critical at a time when many are sounding the alarm about Canadian credit quality.

Second, TD Bank has a popular and fast-growing U.S. retail business, which makes up about 35% of the company’s total operations and is growing at 30% year over year. This fast growth could easily continue, as TD Bank is still only the eighth-biggest bank in the states and has barely scratched the surface of west coast markets like L.A. and the Bay Area.

Finally, TD Bank pays a generous dividend that yields approximately 4%, while also having a low payout ratio of just 44%. That dividend has also been growing over time, so, for income investors, this is pretty much a no-brainer. There are some short-term credit concerns, to be sure, but TD Bank is well protected by its geographic diversification.

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Fool contributor Andrew Button has no position in any of the stocks mentioned.

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