For retirees, the prospect of living off of just Old Age Security (OAS) and the Canada Pension Plan (CPP) may be concerning. Without recurring income from a steady job, it could result in a significant adjustment to your living standards to ensure you have enough to get by.
One alternative is to continue working, but the problem there is if you work too much, the government will claw back OAS payments if your income becomes too high. If you have savings, however, there could be an even better alternative: using your Tax-Free Savings Account (TFSA).
The benefit of a TFSA is that anything you earn inside the account, as long as it’s an eligible investment (which most mainstream stocks are), is tax-free and you don’t have to worry about it being taxed or impacting your OAS payments. Anything withdrawn from a TFSA is tax free — and that includes dividend income.
That’s why a good strategy for retirees is to buy shares of a dividend stock inside your TFSA. With a cumulative limit of $69,500 if you’ve never invested in a TFSA, that could provide you with plenty of options to generate some recurring income.
One stock that offers a good option for at least a good chunk of that room is Enbridge Inc (TSX:ENB)(NYSE:ENB). The oil and gas stock is one of the largest companies on the TSX with a market cap of more than $100 billion.
It pays investors a quarterly dividend of $0.81, which means you can earn a yield of around 6% per year. But what makes Enbridge an even better buy is its track record for growing its dividend payments as well, which means that you can be earning even more in dividend income years from now.
But let’s put the dividend payments into actual dollars. If you were to invest $25,000 into Enbridge today, you would earn an extra $1,500 a year, or about $375 every three months.
And don’t forget: that’s on top of the returns you can own from any increase in the share price. In 2019, shares of Enbridge rose by 22%. However, you can always just choose to hang on and collect the dividend and not sell, thereby ensuring you have that recurring stream of cash flow.
Many other options out there
Whether or not you invest in Enbridge, you’ll still likely want to round out your portfolio with other investments. One easy way to do that is to invest in an ETF, as it can be an easy way to diversify your holdings while also earning a dividend.
The only downside is that the yields will likely be less than the 6% you can earn with a stock like Enbridge. However, the risk will also be reduced given that your returns will be impacted by a wide range of stocks rather than just a single investment.
You can fine-tune your strategy to your own personal needs, as there’s a lot of flexibility as to the different stocks and ETFs that you can invest in.
And by putting those income-generating investments into a TFSA, you can help boost your savings and purchasing power during your retirement years.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.