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TFSA Income Investors: How to Create a 5% Yielding Dividend Growth Portfolio

As the allowable maximum total contributions reach $69,500 with another $6,000 deposit limit for 2020, the Canadian Tax-Free Savings Account (TSFA) is now a significant investment and tax-planning tool offering residents the opportunity to create a perpetually tax shielded retirement portfolio.

The tax-free account can be structured to generate frequent, regular and reliable income streams during retirement, with target yields as  lucrative as 6% per annum and a very reasonable risk profile to augment RRSP, CPP and other pension payouts.

Scoop the Royal Bank of Canada’s (RBC) near 4% yield

The country’s biggest chartered bank by market capitalization, the Royal Bank of Canada’s (TSX:RY)(NYSE:RY) stock underperformed the broad Canadian equities market (as represented by the S&P/TSX Composite Index) over the past year, as a generally negative investor sentiment weighed on the Big Five chartered banks’ valuation in 2019 to give long-term dividend growth investors some good initial yields on costs currently.

Shares in RBC yield a juicy 3.97% today, and once captured, this yield could grow with time provided the bank sticks to its traditional dividend growth policy as it continues to generate higher revenues and increasing its earnings per share.

Analysts expect RBC to grow its earnings per share by an average of 6% annually between fiscal years 2020 and 2022 as the bank’s market grows and the local housing sector’s activity firms. The bank’s well-covered quarterly dividend could grow with earnings too.

While the payout might not grow as fast, if management increases the dividend by 36% in the next five years as they did historically, new investors today could be harvesting a 5.4% annual yield by 2023.

This is the beauty of dividend growth investing.

Augment income with Enbridge’s 6% yield

Energy infrastructure and utility giant Enbridge (TSX:ENB)(NYSE:ENB) has never missed a dividend pay-out over the past 66 years, and management has been increasing the well covered quarterly dividend by an average of 10% over the past three years to 2020.

Shares yield a juicy 6% today, and we could see a further 5-7% annual dividend growth rate over the next three years, as the company has increased its capital expenditure program on business expansion projects in order to sustain a recently strong growth in operating earnings (as measured by EBITDA) and distributable cash flows.

The yield on today’s cost could top 7% by 2023 if the dividend is increased at the low end estimate of 5% per year to 2023. As well, there could be some significant capital gains on this otherwise recently sideways trading stock that’s seen the share price underperform, operating efficiency improvements, a stellar earnings performance, and strong cash flow generation.

Take note that this lousy stock could potentially generate significant total returns in the long term.

How to create a 5% yielding portfolio?

By allocating the 2020 contribution equally among the two stable and defensive stocks, the total yield on new money would be a respectable 5% for 2020. Naturally, I would expect the annual yield to grow to a juicier 6.2% by 2023 based on dividend growth expectations alone.

The two picks can also serve as core holdings, and you could allocate some of the old TFSA deposits into them, but remember to keep the portfolio reasonably diversified in order to avoid this risk.

Reinvesting any payouts during the period could further compound the income growth rate for a more relaxed, tax-free and financially secure retirement.

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Fool contributor Brian Paradza has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.

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