Canadian retirees are searching for ways to boost the returns on their savings and drive higher passive income inside their self-directed Tax-Free Savings Account (TFSA) portfolios. The market correction is finally giving pensioners a chance to buy top TSX dividend stocks at cheap prices.
TFSA benefits
The TFSA limit for 2023 is $6,500. This brings the cumulative maximum total contribution room to $88,000 since the TFSA came into existence in 2009.
Anyone can benefit from earnings tax-free income inside the TFSA, but retirees who collect Old Age Security (OAS) pensions should really maximize the use of a TFSA. All interest, dividends, and capital gains earned inside a TFSA and removed are not taxable by the Canada Revenue Agency (CRA). In addition, the income from the TFSA does not get counted towards the CRA’s net world income calculation that is used to determine the OAS clawback.
Retirees who earn too much money from government pensions, company pensions, Registered Retirement Income Fund payments, and other taxable income are at risk of being hit with the OAS pension recovery tax. Dividends, in particular, are worth watching. The dividend gross-up that occurs on dividends held in taxable accounts can inflate net world income. Earning income inside the TFSA instead of inside a taxable account helps avoid or reduce the hit.
Guaranteed Investment Certificate rates are more attractive now than they have been in years, but some top TSX dividend stocks still offer higher yields and good dividend growth for investors who can handle the added risk.
Enbridge
Enbridge (TSX: ENB) raised its dividend in each of the past 28 years, and investors should see the trend continue, even if the size of the increase is smaller than in the past. Enbridge is growing at a slower pace than it did in the days of massive pipeline construction, but it is still delivering solid results supported by reliable cash flow.
The current $18 billion capital program is largely focused on the natural gas and renewable energy divisions. Enbridge is also shifting investments towards exports of oil and liquefied natural gas (LNG) as global demand for Canadian and U.S. supplies is set to grow.
Enbridge trades near $52 per share at the time of writing. The stock was above $59 at one point last year. Investors who buy at the current price can get a dividend yield of 6.8%.
TD Bank
TD (TSX: TD) is Canada’s second-largest bank with a current market capitalization near $150 billion. The stock trades near $82 at the time of writing compared to $100 a year ago. Investors who buy TD stock right now can get a 4.7% dividend yield.
TD is down due to the broader pullback in bank stocks that has occurred after the recent failures of banks in the United States and Europe. TD is also in the middle of trying to close its US$13.4 billion acquisition of First Horizon, a U.S. regional bank.
Market jitters are expected to continue, and investors could see more downside in TD’s share price. However, the big Canadian banks should remain safe bets and TD expects fiscal 2023 adjusted earnings to be 7-10% higher than last year. TD’s compound annual dividend-growth rate is better than 10% over the past 25 years, so the payout should increase at a steady pace.
This is a bit of a contrarian pick today, but buy-and-hold income investors should do well with TD over the longer term.
The bottom line on top stocks for TFSA passive income
Enbridge and TD are market leaders with attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA focused on passive income, these stock deserve to be on your radar.
