Canadian retirees and other investors are searching for ways to get steady passive-income streams from their savings without being hit with higher tax bills.
TFSA investing
The government created the TFSA in 2009 to give Canadians another savings tool in addition to the RRSP to help meet their financial goals.
Since its inception, the maximum TFSA contribution space has grown to $81,500 per person. The TFSA limit increased by $6,000 in 2022. All interest, dividends, and capital gains earned inside the TFSA are tax-free. This means income investors can pull out their earnings and not worry about the gains bumping them into a higher tax bracket. Investors who are still building their retirement fund can take the full value of dividends and invest them in new shares to harness the power of compounding.
The best investments to make depend on your income needs and your willingness to ride out market volatility. A GIC is the safest bet, but GIC rates are currently below inflation. Another option is to buy top dividend stocks that have strong earnings and good track records of increasing the payouts.
Fortunately, the recent pullback in the TSX is giving income investors a chance to buy some good dividend stocks at cheap prices.
TC Energy
TC Energy (TSX: TRP)(NYSE: TRP) is a giant in the North American energy infrastructure sector with more than 90,000 km of natural gas pipelines in Canada, the United States, and Mexico. The company also has oil pipelines and power-generation facilities.
TC Energy is working on $22 billion in capital projects over the next few years that will help drive revenue and cash flow growth to support steady dividend increases. The current plan is to raise the dividend by 3-5% per year. This is less than historical gains but still good guidance for income investors.
The stock looks undervalued at the current share price near $62 per share. It was $75 before the pandemic. At the time of writing, investors can pick up a 5.6% dividend yield.
Manulife
Manulife (TSX: MFC)(NYSE: MFC) is an insurance and wealth management company with operations primarily located in Canada, the United States, and throughout Asia.
The firm delivered strong Q3 2021 results, and the Q4 numbers should also be positive. Manulife has done a good job of reducing risk across its business in recent years after the company took a big hit during the Great Recession. The recent deal to reinsure 75% of its U.S. variable annuities business takes the process another step and unlocks about $2 billion in value.
The board recently raised the dividend by 18% to a new quarterly payout of $0.33 per share. That’s good for an annualized yield of 5.3% at the time of writing.
Manulife has strong long-term growth opportunities in the Asia business, and the stock appears cheap right now for patient investors.
The bottom line on top stocks for TFSA passive income
TC Energy and Manulife are good examples of top dividend stocks that should be attractive picks for TFSA investors focused on passive income. A diversified portfolio could easily provide an average dividend yield of 5.25% right now. This would generate $4,278.75 per year in tax-free income on a TFSA of $81,500.
