Investing in blue-chip or fundamentally strong companies is a proven method to derive outsized gains over time. Most blue-chip companies pay investors a dividend and typically increase these payouts every year, making them attractive to those looking to generate a passive stream of income.
If these high-yielding stocks are held in a TFSA (Tax-Free Savings Account), any returns generated in the form of capital gains or dividends are exempt from taxes.
It makes sense to identify companies that enjoy competitive advantages and a wide economic moat, allowing them to grow profits across market cycles.
Here are two quality TSX dividend stocks that can help TFSA investors earn passive income for decades.
One of the largest companies in Canada, Fortis (TSX:FTS) pays investors an annual dividend of $2.26 per share, indicating a forward yield of 4.2%. A utility giant, Fortis has increased dividends for 49 years annually, the second-largest streak for a Canadian company. It expects to raise dividends between 4% and 6% each year through 2027.
Fortis operates in the highly regulated gas and electric utility industry. It serves customers across 17 jurisdictions in North America. Equipped with an investment-grade balance sheet, Fortis has a sustainable payout ratio, allowing it to strengthen its balance sheet, reinvest in growth, and increase dividends.
Fortis owns and operates 10 regulated utility businesses and services 3.4 million electric and gas customers. Around 99% of its utility assets are regulated, enabling the company to earn steady cash flows, even during economic downturns.
Further, its operating costs have increased by 2% annually between 2017 and 2022, suggesting Fortis can thrive, even during inflation.
Fortis confirmed it will deploy $22.3 billion towards capital expenditures in the next five years. Around $6 billion will be allocated to investments in the clean energy space, expanding its base of cash-generating assets, which, in turn should support higher dividend payments.
In the last decade, Fortis stock has returned 9% annually to shareholders after adjusting for dividends. FTS stock has also gained a cumulative 750% in the last 20 years compared to returns of 410% for the TSX index.
Analysts expect FTS stock to gain another 6.5% in the next 12 months. After accounting for dividends, total returns will be closer to 11%.
Brookfield Infrastructure Partners stock
A diversified infrastructure company, Brookfield Infrastructure Partners (TSX:BIP.UN) also offers investors a tasty dividend yield of 4.6%. Investing in infrastructure is capital intensive, but these assets allow companies to earn a reliable stream of cash flows.
Brookfield Infrastructure provides investors with exposure to several markets across the Americas, Asia, and Europe. It has invested heavily in sectors including energy, utilities, transport, data centres, and cellular towers.
Historically, Brookfield Infrastructure has acquired assets at a cheap price. It then operates the assets efficiently and sells them at a fair market price, if possible. The funds from the sale are then again used to acquire other cash-generating assets.
This business model has allowed BIP stock to return 1,270% to shareholders in dividend-adjusted gains since the company went public back in 2009. Now, the TSX heavyweight aims to increase cash flows and dividends between 5% and 9% annually, making the stock an extremely compelling bet at current valuations.
Analysts tracking BIP stock expect it to gain more than 40% in the next 12 months.