Investors are using their Tax-Free Savings Account (TFSA) to build portfolios of top TSX dividend stocks that can deliver reliable and growing tax-free passive income to complement Canada Pension Plan (CPP), Old Age Security (OAS), and company pensions.
TFSA benefit
Seniors are taking advantage of the tax-free benefits of the TFSA to protect against OAS clawbacks and to serve as a place to put Registered Retirement Income Fund (RRIF) withdrawals that aren’t needed to cover living expenses.
The Canada Revenue Agency implements an OAS recovery tax of 15% once net world income tops a minimum threshold. One way to reduce or avoid the hit is to utilize the available TFSA contribution limit before making investments in taxable accounts. In 2023, seniors have as much as $88,000 in TFSA contribution space built up since the program launched in 2009.
Guaranteed Investment Certificate (GIC) rates are now attractive around 5%, but top TSX dividend stocks with growing payouts still deserve to be in your portfolio.
Enbridge
Enbridge (TSX:ENB) moves 30% of the oil produced in Canada and about one-fifth of the natural gas used in the United States. The vast pipeline infrastructure is strategically important for the smooth operation of the economies of the two countries.
Getting approval to build large new oil pipelines is nearly impossible these days. This means the existing infrastructure should increase in value as oil demand rises. Enbridge is shifting new investments to other opportunities, including oil and natural gas exports and the expansion of its renewable energy division.
Enbridge stock looks cheap right now trading near $49. It was above $59 per share in June last year.
Investors who buy at the current level can get a 7.2% dividend yield and should see annual dividend hikes in the 3% range, based on projected earnings growth and distributable cash flow growth. Enbridge has increased the payout in each of the past 28 years.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) recently raised its quarterly dividend to $1.06 from $1.03 per share. The decision should give investors confidence to own the stock at time when bank stocks are out of favour. Bank of Nova Scotia trades for close to $66 at the time of writing compared to more than $93 in early 2022.
A recession is likely on the way and banks are already setting more cash aside to cover potential loan losses, but the extent of the decline in Bank of Nova Scotia’s share price is likely overdone. The company continues to generate strong profits and has ample capital reserves to ride out an economic downturn. Investors who buy the shares at the current level can get a 6.4% dividend yield.
The bottom line on top stocks for retirement income
Stocks come with risks and more downside is certainly possible for Enbridge and Bank of Nova Scotia. However, these stocks pay attractive dividends that should continue to grow. If you can handle some turbulence and are looking for high dividend yields, ENB and BNS deserve to be on your radar for a TFSA focused on passive income.
