Canadian retirees get income from a variety of sources.
Defined benefit (DB) pensions used to be common but are increasingly being replaced by defined contribution (DC) plans that shift the risk from the employer to the employee. The payouts in a DC plan are determined by the performance of the portfolio over the investment term, rather than being guaranteed by the company, as is the case with a DB pension.
Most people will also receive CPP and OAS payments. The CPP payout depends on years and level of contributions. Regarding the OAS pension, the payout requires at least 10 years of residency in Canada after the age of 18 and 40 years to get the full amount.
Investors who are 72 years of age or older might also have RRIF payments coming from previous RRSP holdings.
Finally, retirees can generate earnings on other savings. Ideally, this is done inside a Tax-Free Savings Account (TFSA) so that the full value of any interest or dividends can go right into your pocket, and you don’t have to worry about the extra income counting towards a possible OAS clawback.
Dividend stocks carry some risk but tend to pay better returns than GICs. Let’s take a look at two top dividend payers that might be interest choices for a TFSA income fund.
Bank of Montreal
Bank of Montreal (TSX: BMO)(NYSE: BMO) has paid its shareholders a dividend for 190 straight years. That’s right; Canada’s oldest bank started giving investors a piece of the profits in 1829 and has maintained the tradition for nearly two centuries.
This is an impressive track record, given the challenges the financial markets have faced over time. It is a credit to the quality of the bank’s stewardship and reflects the value of a balanced revenue stream.
Bank of Montreal gets its income from personal banking, commercial banking, wealth management, and capital markets activities.
The Canadian business provides the bulk of the earnings, but Bank of Montreal also has a long-standing presence in the United States. This provides a nice hedge against potential trouble in the Canadian economy and gives investors a good way to get exposure to the United States through a Canadian stock.
The dividend should continue to grow at a steady pace and currently offers a yield of 4.2%.
Fortis
Fortis (TSX: FTS)(NYSE: FTS) is another Canadian stock with diverse geographic exposure. The company has more than $50 billion in utility assets located in Canada, the United States, and the Caribbean.
Investments in recent years included the US$11.3 billion acquisition of Michigan-based ITC Holdings and the US$4.5 billion purchase of Arizona-based UNS Energy. The integration of the new businesses went well and added key U.S. revenue streams to the portfolio.
Fortis is working through a five-year capital plan that will see the company spend $18.3 billion. The result will be a nice boost to the rate base and steady revenue growth to support annual dividend increases of about 6% through at least 2023.
The board has raised the dividend in each of the past 46 years. As a result, investors should see the trend continue beyond the current guidance.
Fortis is a good stock to own through times of economic turmoil. The assets operate in regulated sectors and people have to turn on the lights regardless of the state of the economy. At the time of writing, the stock provides a 3.6% yield.
The bottom line
Bank of Montreal and Fortis are top-quality dividend stocks with strong track records of reliable distributions.
If you have some cash sitting on the sidelines, these stocks deserve to be on your radar for a TFSA income portfolio.
