The market correction is giving investors a chance to buy leading Canadian dividend stocks at discounted prices for a Tax-Free Savings Account (TFSA) portfolio focused on dividends and total returns.
TFSA advantage
The TFSA limit is $6,500 for 2023. This brings the maximum total contribution room to $88,000 since the inception of the TFSA in 2009.
All interest, dividends, and capital gains earned inside the TFSA are exempt from being taxed and can be removed at any time. This gives TFSA investors flexibility to access funds for emergencies or planned purchases.
Younger investors often contribute to the TFSA as their first line of retirement savings and keep contribution space in their Registered Retirement Savings Plan (RRSP) open for future years when they plan to be in a higher marginal tax bracket. RRSP contributions are used to reduce taxable income in the relevant year.
A variety of investments can be held inside a TFSA. One popular investing strategy involves owning top TSX dividend stocks and using the distributions to buy new shares and harness the power of compounding.
BCE
BCE (TSX:BCE) is Canada’s largest communications company with a current market capitalization near $57 billion. The stock trades for close to $63 per share at the time of writing compared to $74 at the high point last year.
Investors can take advantage of the pullback to get a 6.1% dividend yield at the current price. BCE increased the dividend by at least 5% in each of the past 15 years and should be able to keep the streak going, even as the economy heads for a potential rough patch.
BCE gets the largest part of its revenue from mobile and internet subscription fees. These services tend to be recession resistant. Everyone needs to stay connected to world, regardless of the state of the economy.
BCE stock isn’t immune, however, to economic challenges. The first-quarter (Q1) 2023 results showed that advertisers are spending less in the media group. At the same time, the surge in interest rates is pushing up borrowing costs for BCE. The company uses debt to help fund its capital programs.
Nonetheless, BCE has the power to raise prices when it needs extra cash and management expects revenue and free cash flow to increase in 2023. This should support another dividend hike next year.
TC Energy
TC Energy (TSX:TRP) trades for close to $53.50 at the time of writing. The stock was as high as $74 last June.
TC Energy is battling with soaring construction costs on its Coastal GasLink pipeline. The expected tally is now projected to be at least $14.5 billion, which is more than double the initial estimate. Fortunately, the pipeline is 87% complete as of the most recent update, so most of the bad news should be in the rearview mirror.
TC Energy’s total capital program is about $34 billion. Management is still targeting solid revenue and cash flow growth that should support planned annual dividend increases of at least 3% over the medium term. The board has raised the distribution annually for more than two decades.
TC Energy’s current dividend yield is close to 7%.
The bottom line on top TSX dividend stocks for a TFSA
BCE and TC Energy pay attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed TFSA, these stocks deserve to be on your radar.
