Canadian investors are taking advantage of their growing TFSA contribution limits to build portfolios of top TSX dividends stocks that generate attractive tax-free passive income.
TFSA benefits
The government launched the TFSA in 2009 to give Canadians another savings vehicle to go along with the RRSP. Since inception, the TFSA limit has increased every year and is now at a maximum of $81,500 per person.
All earnings generated inside the TFSA remains beyond the reach of the CRA. Withdrawals do not get added to net world income, so investors won’t be bumped into a higher tax bracket. In addition, the CRA does not include TFSA income in its calculation to determine the Old Age Security pension recovery tax, often called the OAS clawback.
Funds removed from the TFSA open up new contribution space in the next calendar year. This is helpful for people who might need to access the TFSA cash for a purchase or to cover an emergency, but want to catch up the TFSA investment down the road.
Let’s take a look at two top TSX dividend stocks that might be good to buy right now for a TFSA focused on passive income.
Fortis
Fortis (TSX: FTS)(NYSE: FTS) operates power generation, electric transmission, and natural gas distribution businesses in Canada, the United States, and the Caribbean. The $58 billion in utility assets generated regulated revenue streams that are both predictable and reliable. This is important for income investors who require steady dividends that grow over time.
Fortis drives revenue growth through strategic acquisitions and investments in new projects across the asset portfolio. The current $20 billion capital program is expected to increase the rate base enough over the next few years to support average annual dividend increases of 6%.
Fortis raised the dividend in each of the past 48 years. The current distribution provides a 3.5% dividend yield. Fortis stock trades near $61 at the time of writing compared to the 2022 high around $65, so investors have a chance to buy the shares on a dip right now.
Royal Bank
Royal Bank (TSX: RY)(NYSE: RY) is a profit machine. Canada’s largest bank by market capitalization generated more than $16 billion in earnings in fiscal 2021 and is off to a strong start in 2022. Royal Bank gets its revenue from several segments that include personal banking, commercial banking, wealth management, capital markets, investor and treasury services, and insurance.
The bank built up a large cash position during the pandemic as a safety net to ride out a potential wave of loan defaults. Government-assistance programs and plunging interest rates helped borrowers make their payments over the past two years, so Royal Bank didn’t need the extra cash and is now putting it to work to drive growth. The bank recently announced a $2.6 billion acquisition in the U.K. to boost its wealth management business in the region. Additional deals could be on the way.
Royal Bank is also repurchasing stock and raised the dividend by 11% for fiscal 2022. Another generous increase is probably on the way for fiscal 2023.
The stock is down to $131 per share from the 2020 high near $150. Investors who buy now can pick up a 3.7% yield.
The bottom line on top stocks for TFSA income
Fortis and Royal Bank have long track records of delivering reliable dividend growth and attractive total returns for investors. If you have some cash to put to work in a TFSA focused on dividends these stocks deserve to be on your radar.
