Retirees and other investors can take advantage of their Tax-Free Savings Account (TFSA) contribution space to build portfolios of top TSX dividend stocks to generate reliable and growing tax-free passive income.
TFSA 101
The government launched the TFSA in 2009. Since then, the cumulative contribution limit has grown to a maximum of $88,000 per person. This large enough for investors to create meaningful portfolios that can deliver steady passive income that is all tax free.
Seniors who receive the Old Age Security (OAS) pension get an added benefit. The Canada Revenue Agency does not include income removed from a TFSA when it calculates a person’s net world income each year to determine the OAS recovery tax, otherwise known as the OAS clawback. This is important because retirees can quite easily reach the minimum income threshold for the OAS clawback if they receive a decent company pension, Canada Pension Plan, OAS, Registered Retirement Income Fund payments, and taxable investment income, or earnings from other investments, including rental properties.
For the 2023 income year, the number to watch is $86,912. Net world income above this amount is hit with a 15% OAS pension recovery tax.
Best investments for a TFSA
Investors can own a wide range of investments inside the TFSA. The rates on Guaranteed Investment Certificates (GICs) are now attractive near 5%. At this level, it makes sense to have part of the portfolio allocated to these no-risk, fixed-income assets.
Top Canadian dividend stocks that have good track records of raising their distributions still deserve to be part of the mix. Owning stocks carries risk because the share price can fall below the purchase price, but steady dividend growth increases the yield on the initial investment. The market correction over the past year is now giving investors a chance to buy some great high-yield Canadian dividend stocks at cheap prices.
Enbridge
Enbridge (TSX:ENB) is a giant in the energy infrastructure industry with pipeline assets that move 30% of the oil produced in Canada and the United States. Enbridge also has natural gas pipelines, natural gas utilities, oil export facilities, and renewable energy assets.
The board raised the dividend in each of the past 28 years. Investors should see steady dividend growth continue in the 3% range, supported by the current $17 billion capital program and any potential acquisitions.
Enbridge trades near $48 per share at the time of writing compared to more than $59 at the peak last year. The drop looks overdone, and investors can now get a 7.4% dividend yield.
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Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) just increased its quarterly dividend from $1.03 to $1.06 per share. The move should be viewed as a vote of confidence by the board in the bank’s ability to deliver decent earnings in the next couple of years, despite the economic headwinds.
Soaring interest rates are putting pressure on commercial and residential borrowers who are carrying too much debt, and loan losses are expected to increase at Bank of Nova Scotia and the other large Canadian banks.
However, Bank of Nova Scotia has a solid capital cushion and remains very profitable. The stock trades near $63.50 at the time of writing compared to more than $80 in August last year. More volatility is possible in the near term, but the dividend should be safe, and investors can currently get a 6.7% dividend yield.
The bottom line on TFSA passive income
Enbridge and Bank of Nova Scotia are just two examples of high-yield dividend stocks that deserve to be on your TFSA radar.
Investors can quite easily put together a diversified TFSA portfolio of GICs and top dividend stocks to get an average yield of 6% today. On a TFSA of $88,000, this would generate $5,280 per year in tax-free income. That’s an average of $440 per month!
