Canadian investors are increasingly using the Tax-Free Savings Account (TFSA) to build retirement portfolios.
The government increased the TFSA limit by $6,000 in 2020, bringing the cumulative total allowance per person to a maximum of $69,500. As a result, a couple now has as much as $139,000 in space to hold investments that can generate interest, dividends, and capital gains tax-free.
The fact that the CRA can’t take a part of your profits is a huge advantage. Sometimes stock portfolios increase significantly over the course of a couple of decades. Having protection against a capital gains tax is therefore extremely important.
In addition, retirees who use the TFSA to generate income don’t have to worry about the earnings being added to their net world income, which the CRA evaluates when determining the OAS pension recovery tax.
Let’s take a look at two dividend stocks that might be interesting picks today.
Fortis
Fortis (TSX:FTS)(NYSE:FTS) might not be a familiar name to many investors. The utility company is based in Eastern Canada and certainly doesn’t get the media attention that is placed on social media, technology, or cannabis stocks.
Investors who are aware of the stock and have held it for years are perfectly happy with its low-profile status.
Fortis has quietly grown to become a major player in the North American utility industry, with more than $50 billion in assets located in Canada, the United States, and the Caribbean.
The company makes strategic acquisitions and also has internal development projects to drive higher revenue. Fortis is currently working through an $18.3 billion capital program that’s expected to boost the rate base significantly over the next five years.
As a result, cash flow should increase enough to support average annual dividend hikes of 6%.
This is solid guidance for investors and the outlook should be reliable. Fortis has increased the dividend in each of the past 46 years.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is Canada’s number three bank by market capitalization.
Investors often skip the stock in favour of its larger peers, but the long-term potential for growth might warrant a closer look.
Bank of Nova Scotia has invested heavily over the past decade to build a significant international business with the main focus on Mexico, Peru, Chile, and Colombia. These countries form the heart of the Pacific Alliance trade bloc that was set up to promote the free movement of goods, capital, and labour.
The combined market is home to more than 225 million people. As the middle-class expands, demand for loans, credit cards, and investment products should increase and Bank of Nova Scotia is positioned well to benefit.
Banking penetration is below 50% in the region and Bank of Nova Scotia can also capitalize on the needs of commercial customers who require additional cash management services when they expand into the other countries.
The international operations are enjoying loan and deposit growth that outpace Canada and the division now accounts for roughly a third of total profits.
Bank of Nova Scotia appears reasonably priced today, and the stock provides a solid 5% dividend yield.
The bottom line
Fortis and Bank of Nova Scotia should continue to be strong picks for a diversified buy-and-hold TFSA retirement fund.
The TSX Index is home to many top stocks that often fly under the radar of Canadian investors.
