The Tax-Free Savings Account, or TFSA, is a tax-sheltered investment account that’s been with us since 2009. Today, the cumulative TFSA contribution limit is $88,000. This can make a significant dent in our tax bill, so it’s best to use this to the fullest extent possible.
In this regard, here are two Canadian dividend stocks to consider buying for your TFSA.
Enbridge: A 7.9% yield for your TFSA
Enbridge (TSX:ENB) is one of Canada’s leading energy infrastructure companies. The company moves nearly 20% of the natural gas consumed in the U.S., and it operates North America’s third-largest natural gas utility. It’s an essential business that’s providing power to North America’s homes and businesses. It’s also a strong business that churns out huge cash flow.
Yet Enbridge stock has been hit by negative investor sentiment: high debt levels and the political noise and environmental concerns surrounding pipelines have not helped Enbridge’s case. But this negative sentiment is a double-edged sword. On the one hand, Enbridge stock does suffer from this sentiment. On the other hand, the stock is yielding a very generous 7.9%. This extra yield is there due to the perceived elevated risk on the stock. Regardless, we can see how this elevated yield means Enbridge would be a nice addition to the tax-sheltered TFSA.
But let’s address this perceived risk. Currently, Enbridge’s debt-to-EBITDA ratio is over 6%, which is high (EBITDA is earnings before interest, taxes, depreciation, and amortization). However, Enbridge’s EBITDA is growing nicely. In fact, it grew 8% in the first quarter of 2023. Furthermore, management believes that it will be at 4.6 times by the end of 2023. This should serve to lessen investor concerns and act as a catalyst to take Enbridge stock higher. And the TFSA would shelter this from tax as well.
Northwest Healthcare Properties REIT: A tax-sheltered, 10.2% yield
As a global owner and operator of healthcare assets, Northwest Healthcare Properties REIT (TSX:NWH.UN) is in a defensive business. And it’s a defensive business that’s also paying investors very healthy dividends. In fact, Northwest currently boasts a dividend yield of 10.2%, making this Canadian stock another good candidate for your TFSA.
If this seems impossible, let’s review how we got here. As in the case of Enbridge’s elevated dividend yield, a major concern with Northwest Healthcare is its debt levels. This is a very valid concern, but let me go over some of the risk-mitigating points.
Northwest’s properties are healthcare properties. This industry is defensive. Also, the leases of these buildings are generally long term in nature, and they are indexed to inflation. Right now, fundamentals are strong. In fact, the occupancy rate for the company’s portfolio of medical buildings is 97%. This means greater returns for Northwest’s properties and greater cash flows.
In 2022, net operating income and revenue both increased 20%. 2022 revenue of approximately $449 million was up 28.4% compared to five years ago. In the first quarter of 2023, revenue increased 29.5% to $135 million. Clearly, trends are strong, as the aging population is driving a booming healthcare sector.
In closing, I would like to take note of Northwest’s dividend history. It has been in effect since 2010. And while it has not grown from there, it’s been steady and stable even in the face of difficulties. This dividend is a priority to management. Recently, the company has been selling off certain non-core assets in order to reduce its debt. So, with a reduced debt balance, a 10% growth rate in adjusted funds flow expected for 2023, and a dividend payout ratio that’s been reduced to 67%, I think Northwest is looking good for your TFSA today.
Bottom line
Consider these dividend stocks to help you make use of your full TFSA contribution limit.
