Canadian savers are taking advantage of their Tax-free Savings Account (TFSA) contribution space to build portfolios of TSX dividend stocks and interest-paying investments that can generate reliable streams of tax-free passive income.
TFSA contribution limit
The TFSA contribution limit is $6,500 for 2023. Qualifying Canadian residents who were at least 18 years old when the government launched the TFSA in 2009 now have as much as $88,000 in TFSA contribution space.
Investing inside a TFSA is popular with retirees and other income investors who want to avoid paying tax on investment earnings. Seniors who collect Old Age Security (OAS) pensions get an added bonus. The earnings from a TFSA are not counted towards net world income when the CRA determines the OAS pension recovery tax.
TFSA withdrawals open up new contribution room in the same amount in the following calendar year. This provides investors with good flexibility to take out cash for emergencies or planned purchases, in addition to the regular income stream. The capital can be put back into the TFSA to start generating income at a later time, if desired.
Soaring interest rates have pushed up the returns investors can get from guaranteed investment certificates (GICs) to around 5% right now. At this level, it makes sense to have some fixed income holdings in a portfolio targeting passive income.
Top TSX dividend stocks still look attractive, especially after the pullback in the market in the past year. Dividend growth increases the yield on the initial investment and some stocks now offer very attractive distributions.
TC Energy
TC Energy (TSX:TRP) operates vast natural gas pipeline infrastructure, natural gas storage, oil pipelines, and power generation facilities. The company is working through a $34 billion capital program that should support annual dividend growth of at least 3% over the medium term.
Demand for natural gas is expected to grow in the coming years as utilities turn to the fuel as an alternative to oil and coal to produce electricity while they build out their renewable energy networks.
TRP looks undervalued at the current price near $53. The stock was as high as $74 in June 2022.
Investors who buy the dip can now get a 7% dividend yield.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) recently raised its quarterly dividend to $1.06 from $1.03. The new payout provides an annualized yield of 6.4% at the current share price near $66. Bank of Nova Scotia traded for more than $80 last summer, so investors can take advantage of the pullback to buy the stock at a nice discount.
Bank of Nova Scotia has a solid capital cushion to ride out potential market turbulence. The bank’s revenue stream is diversified and Bank of Nova Scotia remains very profitable. Loan losses are expected to increase in the coming quarters, but the decline in the share price is pricing in a worse situation than is likely to occur. Economists broadly expect the economy to go through a short and mild recession in the next 12-18 months.
The bottom line on TFSA passive income
TC Energy and Bank of Nova Scotia are examples of high-yield stocks that should continue to increase their distributions. Investors looking to build a diversified portfolio of dividend stocks and GICs can quite easily get an average yield of 5.5% right now. This would generate $4,840 per year on $88,000 in TFSA investments.
That’s an average of more than $403 per month in tax-free passive income!
