Canadian retirees are searching for ways to get more income out of their savings without being bumped into a higher tax bracket or getting hit with a CRA clawback on their OAS pensions.
Pension recovery tax
The CRA applies a 15% OAS clawback on every dollar of net world income earned above a minimum threshold. The barrier for the 2020 tax year is $79,054. Retirees receive income from a number of taxable sources. These can include company pensions, CPP, OAS, and RRIF payments. Earnings on investments in taxable accounts also go into the mix. Income from rental properties or a side business counts as well.
A person who receives a decent defined-benefit pension along will full CPP and OAS can quickly top the $79,000 mark. This is why the TFSA is so popular with retirees.
Income generated inside the TFSA is not taxed, and earnings or profits removed from the TFSA are not used by the CRA to calculate net world income. The TFSA contribution limit is as high as $69,500 per person in 2020. That is adequate space to build a decent income fund to get tax-free dividends and boost earnings.
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The market crash is giving retirees a chance to buy top dividend stocks at bargain prices. In fact, some analysts say the deals available right now on industry leaders with strong track records of dividend growth might be the buying opportunity of a lifetime.
Let’s take a look at one cheap stock that might be an interesting pick right now for a diversified TFSA income fund.
BCE (TSX:BCE)(NYSE:BCE) is Canada’s largest communications service provider with wireless and wireline networks across the country providing mobile, internet, and TV access to homes and businesses. The lockdown due to the coronavirus outbreak could result in strong numbers for BCE’s communications operations.
Broadband demand is soaring, as people work from home and kids remain confined to the house amid school closures. Video streaming is likely hitting record levels across multiple platforms. Subscription growth and upgrades to higher-end services could result in a surprise boost to revenue.
BCE’s media group, however, is probably taking a hit. The professional sports leagues are on hold, and advertising on TV and radio stations is expected to drop, as businesses preserve cash through the downturn. Overall, the media group is a small part of BCE’s total revenue mix, so the impact shouldn’t be too drastic.
BCE raised the dividend by 5% for 2020. The distribution should be very safe, and investors who buy the stock at the current price of $54 can pick up a 6% yield. BCE traded at $65 per share in February, so there is decent upside potential once the market recovers.
Ongoing volatility should be expected in the near term, but buy-and-hold investors might want to start adding BCE to their income portfolios at this level.
The bottom line
BCE should be a solid income pick for dividend investors, but it isn’t the only deal out there today. Several top TSX Index dividend stocks appear cheap, and investors can quite easily build a fund with a 6% yield.
On a $69,500 TFSA, this would provide an average tax-free income of $347.50 per month that wouldn’t put OAS payments at risk.
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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 Andrew Walker owns shares of BCE.