BCE (TSX:BCE) and Royal Bank (TSX:RY) are top TSX stocks with leadership positions in their respective industries. New Tax-Free Savings Account (TFSA) investors seeking quality dividend stocks to add to their retirement portfolios are wondering if the pullback in the share prices of BCE and Royal Bank from their 2022 highs makes them good stocks to buy today.
TFSA benefits
The TFSA limit for 2023 is $6,500. This brings the maximum cumulative contribution room to $88,000 for anyone who has qualified since the TFSA came in to existence in 2009.
Young investors in the early part of their careers might prefer to use the TFSA for their retirement savings and keep Registered Retirement Savings Plan (RRSP) contribution room open until they move into a higher marginal tax bracket. RRSP contributions reduce taxable income in the relevant year but are taxed when the money is removed down the road. Ideally, investors want to contribute when they are at peak earnings and pull the money back out at a lower marginal tax rate.
Retirees can take advantage of the tax-free rules of the TFSA to generate passive income that won’t put their Old Age Security (OAS) pension at risk of a clawback. The CRA does not include TFSA earnings when calculating net world income to determine the OAS pension recovery tax.
BCE
BCE trades for close to $63 per share at the time of writing and provides a 6% dividend yield. The stock is off the October low near $56 but still down from the $73 it fetched a year ago.
The steep increase in interest rates over the past year will put a pinch on BCE’s earnings in 2023 due to higher borrowing costs. However, the company still expects to deliver revenue growth and higher free cash flow compared to 2022. This means investors should see another decent dividend increase in 2024.
BCE raised the payout by at least 5% annually for the past 15 years.
The company gets most of its revenue from mobile and internet subscription services that people and businesses need, regardless of the situation in the economy. As such, BCE should be a solid stock to own through an economic downturn.
Royal Bank
Royal Bank is Canada’s largest financial institution with a current market capitalization near $182 billion. It also ranks among the top 10 on the planet based on this metric.
Royal Bank stock trades for close to $131 per share at the time of writing. This is down from $139 in February. The dip is largely due to a pullback in the broader bank sector that occurred in March after bank failures in the United States and Europe scared investors.
Smaller banks will likely remain under pressure as the market tries to sort out who will be able to make it through a period of declining deposits and rising loan defaults caused by high inflation and the spike in interest rates.
Royal Bank is probably a beneficiary in the current turbulence as people and businesses move cash from small banks to the giants. This is likely why the share price is holding up better than some of its peers. Royal Bank has also refrained from making a big post-pandemic U.S. acquisition. Instead, Royal Bank is bulking up its Canadian operations through its purchase of HSBC Canada.
RY stock isn’t cheap today at 12.5 times trailing 12-month earnings, and there could be additional volatility in the bank sector over the course of the next 12-18 months. That being said, Royal Bank should be a solid buy-and-hold anchor pick for patient investors. The current dividend yield is 4%.
Is one a better TFSA pick?
BCE and Royal Bank deserve to be part of a diversified TFSA portfolio focused on dividends and total returns. If you only buy one, I would make BCE the first choice today. The stock appears oversold, and you get a better dividend yield for a portfolio targeting passive income.
