Canadians are increasingly turning to their Tax-Free Savings Account (TFSA) to generate reliable streams of additional income.
The strategy makes sense for anyone who wants to boost cash flow without having to pay the Canada Revenue Agency more taxes. Retirees who are receiving OAS payments find the TFSA particularly useful, as the earnings are not counted toward possible clawbacks.
Let’s take a look at two dividend stocks that might be interesting picks today for your TFSA.
Fortis
Fortis has raised its dividend every year for more than four decades, and investors should see the trend continue in the near future.
The company is investing $18.3 billion in capital projects as part of a five-year development program that is expected to boost the rate base from $28 billion in 2019 to $34 billion in 2022 and $38.4 billion in 2024. This puts the three-year compound annual growth rate at 7.2% and the five-year rate at 6.5%.
As a result, Fortis intends to raise the dividend by an average annual rate of 6% over that time frame.
Additional growth opportunities are being considered across the asset portfolio. Fortis is considering an expansion of its liquefied natural gas infrastructure in British Columbia and an electric transmission project in Ontario. Acquisitions are also a possibility, as the North American utility sector continues to consolidate.
Investors who buy the stock today can pick up a 3.5% yield with steady dividend growth on the horizon.
Royal Bank of Canada
Royal Bank of Canada (TSX:RY)(NYSE:RY) is a profit machine.
The company earned $12.9 billion in fiscal 2019, despite headwinds for the broader Canadian banking sector.
Royal Bank’s success is connected to its balanced revenue stream with strong operations in several segments in the industry.
Royal Bank is known for its wealth management business, and that area could growth through additional acquisitions. The company spent US$5 billion in 2015 to buy City National, a commercial and private bank in California known for its wealthy Hollywood clients.
While Royal Bank operates in more than 30 countries, the Canadian business still contributes 62% of revenue. The U.S. adds 23%, and the international businesses kick in the rest.
The bank has a compound annual dividend-growth rate of 7% over the past decade. Earnings per share are expected to grow by at least 7% over the medium term, so steady dividend increases should be on the way. The current payout provides a yield of 4%.
The bottom line
Beginning in 2020, the TFSA contribution limit will increase by $6,000, bringing the cumulative total to as much as $69,500 per person. A portfolio split between Fortis and Royal Bank would generate an average yield of 3.75% or $2,606.25 per year. That’s an extra $217 per month.
A retired couple would be able to earn $434 per month and not have to worry about the earnings being counted toward their net world income, which the CRA uses to determine potential OAS pension recovery taxes.
Diversification is always a good idea and the TSX Index is home to many top dividend stocks that have strong track records of delivering rising distributions for income investors.
A balanced portfolio with Royal Bank and Fortis as anchor picks would easily generate a similar yield.
