Most Canadian retirees depend on their savings and pension payouts to lead a comfortable retirement life. Any manner by which they are able to boost their income without paying taxes to the Canada Revenue Agency is a bonus.
The government pays Canadians via pension programs such as the Canada Pension Plan (CPP) and Old Age Security (OAS). The OAS is in fact the country’s largest pension program and retirees might be concerned over CRA clawbacks for this payout.
According to the CRA, in case your net income exceeds $77,580 in 2018 you will be imposed with a 15% recovery tax for every dollar earned above the threshold amount. Further, in case your net income exceeds $128,137, the CRA will withdraw the entire OAS pension amount for that year.
While earning over $77,000 during retirement is a good luxury to have, you can reduce OAS clawbacks by holding investments in your Tax-Free Savings Account (TFSA). The TFSA was introduced back in 2009 and is a tax-sheltered account. While contributions toward your TFSA are not tax deductible, any withdrawals in the form of dividends or capital gains are tax-free.
The amount earned in a TFSA is not included while calculating your net annual income. As of 2020, the cumulative contribution limit is $69,500.
Dividend stocks will supplement your OAS payments
At a time when interest rates are nearing record lows, it makes sense to invest in quality dividend stocks such as TC Energy (TSX:TRP)(NYSE:TRP). Top dividend stocks — including TC Energy — have a predictable stream of cash flows that help them sustain payouts and create long-term wealth for investors. Retirees can use dividend stocks to supplement their OAS pension and create another passive income stream.
TC Energy is a Canadian pipeline heavyweight with a yield of a tasty 5.5%. In fact, the company expects to increase dividends between 8% and 10% for 2021 and at an annual rate of between 5% and 7% post-2021.
If you invest your entire TFSA contribution room in TC Energy, you can generate up to $3,822.5 in annual dividend income. This indicates a monthly payout of approximately $320. In case TC Energy manages to increase dividends as per its forecasts, retirees can receive $6,640 a year at the end of 10 years, after accounting for dividend re-investments.
There are several reasons why TC Energy remains a top dividend growth stock. It generates a stable stream of cash flows due to long-term contracts. The company has a robust financial profile, a strong balance sheet, and a conservative payout ratio. TC Energy continues to invest in expansion programs which will generate future cash flows and help sustain its dividend growth plan.
The Foolish takeaway
We can see how dividend stocks can help generate a constant stream of revenue during retirement. Companies like TC Energy will also help build long-term wealth via capital appreciation.
While it is not advisable to allocate all your TFSA funds in a single stock, you need to identify similar companies with solid cash flows and the flexibility to increase dividend payouts over time.
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 Aditya Raghunath has no position in any of the stocks mentioned.