Canadian savers are using their self-directed Tax-Free Savings Account (TFSA) to build portfolios of top TSX dividend stocks as part of their retirement planning strategy. The market correction is now giving TFSA investors a chance to buy some top Canadian dividend stocks at cheap prices.
TFSA benefits
Retirees are taking advantage of the TFSA to generate tax-free income on their savings. The benefit of owning dividend stocks inside the TFSA as opposed to in a taxable account goes beyond the tax-free treatment of the distributions and capital gains.
How?
Earnings removed from the TFSA do not count towards the net world income calculation made by the Canada Revenue Agency (CRA) to determine the clawback on Old Age Security (OAS) pension payments. This is important to consider for retirees who receive taxable income from a variety of sources, including work pensions, Canada Pension Plan, OAS, and Registered Retirement Income Fund payments. Once net world income hits the minimum threshold, the CRA implements 15% OAS pension recovery tax.
Young investors often contribute savings to a TFSA before using up Registered Retirement Savings Plan (RRSP) contribution space. The idea is that people will likely be in a higher marginal tax bracket later in their careers. RRSP contributions reduce taxable income, so it makes sense to get the highest tax reduction possible on the contributed funds. RRSP withdrawals are taxed as income. Ideally, with a bit of planning, the RRSP cash will be withdrawn in retirement when the person is in a lower tax bracket.
The TFSA also provides investors with flexibility. Funds can be removed at any time to cover an emergency, and the amount of the withdrawal is added back to the TFSA contribution space in the following calendar year.
Guaranteed Investment Certificates (GICs) now offer attractive no-risk rates around 5%, but high-quality dividend stocks still deserve to be part of the portfolio. As dividends increase the return on the initial investment rises and top dividend-growth stocks tend to move higher over the long run.
Fortis
Fortis (TSX:FTS) raised its dividend in each of the past 49 years and intends to boost the payout by at least 4% annually through 2027. The stock trades near $56.50 at the time of writing compared to a high near $65 at the peak last year.
At the time of writing, the distribution provides and annualized yield of 4%.
Fortis is working on a $22.3 billion capital program that is expected to boost the rate base an average of 6% per year over five years. The resulting revenue and cash flow growth should support the dividend increases.
Fortis gets most of its revenue from rate-regulated utility businesses, so the stock should be good to own through a recession.
BCE
BCE (TSX:BCE) trades near $59 per share at the time of writing compared to more than $73 at the top in 2022. The pullback appears overdone, even as high interest rates drive up debt expenses and weaker advertising revenue puts pressure on the media business.
BCE’s core mobile and internet subscription services generate strong revenue streams that should remain steady during an economic downturn. People and businesses need to communicate, regardless of the state of the economy.
In the first quarter (Q1) of 2023 earnings report BCE said it expects revenue to grow by up to 5% in 2023 and sees free cash flow rising as much as 10% compared to 2022. This should support another decent dividend increase for 2024. BCE raised the dividend by at least 5% in each of the past 15 years.
At the time of writing, BCE provides a 6.5% dividend yield.
The bottom line on top stocks for TFSA investors
Fortis and BCE are top TSX stocks with attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA focused on passive income or total returns, these stocks deserve to be on your radar.
