Canadians have cold feet entering the sunset years because they don’t know if they’re saving enough for retirement. The sharp rise in inflation or cost of living is pushing manyół to rethink their plans and delay retirement. If you have the same worry, there’s a way to earn tax-free income throughout your lifetime.
The Tax-Free Savings Account (TFSA) can help boost your confidence and be worry-free in retirement. While contributions to the registered account are not tax deductible, money growth and withdrawals are tax-exempt.
Amazing discovery
Use your contribution limit or available contribution room to purchase income-producing assets like dividend stocks and hold them in your TFSA. Since all gains, interest, and dividends are tax-free, your TFSA balance grows faster through the power of compounding.
The suggestion is to keep reinvesting the dividends and accumulate more shares. Your principal remains intact, while TFSA dividend earnings augment retirement benefits like the Canada Pension Plan (CPP) and Old Age Security (OAS).
The financial (30.8%) and energy (18.1%) sectors constitute nearly 50% of the Toronto Stock Exchange (TSX). Dividend stocks in each sector are ideal holdings for your TFSA. The Canadian Imperial Bank of Commerce (TSX:CM) and TC Energy (TSX:TRP) are among the best in the lot. Read on to discover why.
Big Bank stock
The Big Five banks in Canada are solid investment choices for dividend earners and long-term investors. Besides the attractive dividend yields, all have paid dividends for over 100 years. CIBC is the fifth-largest bank, and its dividend track record is 155 years and counting.
If you invest today ($55.62 per share), the dividend yield is a juicy 6.23%. Let’s assume your available TFSA contribution room (accumulated since 2009) is $55,620, and you have the same amount to invest. You can purchase 1,000 CIBC shares and see your money grow to $103,207.45 in 10 years.
According to a CIBC retirement survey, 42% of Canadians are confident they are saving enough to meet their retirement goals or ambitions. Also, the same percentage of respondents with a TFSA and Registered Retirement Savings Plan (RRSP) contribute more to the former than the latter.
Pipeline stock
Pipeline stocks are solid investment choices, notwithstanding the volatile energy sector. Their revenues come from long-term contracts and are regulated tolls. TC Energy has been in the oil and gas midstream industry since 1951. The $51.8 billion energy infrastructure company owns a stable natural gas and crude oil pipeline network.
TC Energy believes natural gas is vital to the energy future, and liquids remain important as low-carbon power generation grows. Its capital rotation program and well-connected network of assets position the pipeline operator for long-term business growth.
Furthermore, management commits to delivering sustainable cash flow growth and maintaining the resiliency of its dividend growth. TC Energy is a dividend aristocrat owing to 23 consecutive years of dividend hikes. At $51.78 per share (-0.67% year to date), the dividend yield is 6.96%.
Slow but sure
The TFSA has prescribed limits yearly, and users can’t over-contribute. Thus, start small, maximize contribution limits if possible, and reinvest the dividends as you go along. You can build a substantial nest egg over time and have enough to live comfortably in retirement.
