Retirees and other investors are taking advantage of their growing Tax-Free Savings Account (TFSA) limit to build portfolios of investments that can generate reliable high-yield passive income.
TFSA basics
The government created the TFSA in 2009 to give Canadians a new vehicle to save money. The TFSA contribution limit for 2023 is $6,500. Anyone who has qualified each year since the TFSA’s inception now has as much as $88,000 in contribution space.
Young people like the TFSA for its flexibility. Cash can be removed at any time, and the amount taken out opens up new contribution space in the next calendar year. The TFSA can be a good vehicle to build savings for holidays, a property, or retirement income.
Pensioners are using the TFSA to earn-tax free passive income that won’t put their Old Age Security (OAS) pensions at risk of a clawback. The Canada Revenue Agency implements a 15% OAS pension recovery tax when net world income tops a minimum threshold. This is important to note, because someone who receives a decent company pension, Canada Pension Plan, OAS, Registered Retirement Income Fund (RRIF) payments, and other taxable income can quickly reach the OAS clawback trigger point.
What are the best investments?
Guaranteed Investment Certificates (GICs) now offer rates above 5% and should be part of the mix. The market correction that has occurred over the past year is also giving TFSA investors a chance to buy great TSX dividend stocks at discounted prices.
Enbridge
Enbridge (TSX: ENB) increased its dividend in each of the past 28 years. Investors should see the trend continue, as Enbridge puts new assets into service from the current $17 billion capital program. Management is targeting adjusted earnings per share (EPS) growth of 4% annually through 2025 and 5% beyond that timeline. Distributable cash flow (DCF) is also expected to grow at a steady pace.
Enbridge trades near $48 per share at the time of writing compared to more than $59 at the high point in 2022.
The pullback looks overdone, considering the solid financial guidance and the strong demand for Enbridge’s services. The company moves nearly a third of all the oil produced in Canada and the United States.
Investors who buy ENB stock at the current level can get a 7.3% dividend yield.
CIBC
CIBC (TSX: CM) increased the dividend when the bank reported fiscal second-quarter (Q2) 2023 results. All the banks are raising their provisions for credit losses (PCL) due to an anticipated increase in loan losses in the coming quarters, but the expected default rate remains very low, and CIBC has the capital cushion to ride out some economic turbulence. The bank had a common equity tier-one (CET1) ratio of 11.9% at the end of April. This is above the 11.5% minimum the Canadian banks will need to maintain in the coming months.
CIBC trades below $56 per share right now compared to more than $80 in early 2022. The drop gives investors a chance to secure a 6.25% dividend yield at the current share price.
The bottom line on TFSA passive income
Enbridge and CIBC are examples of high-yield dividend stocks with growing distributions that deserve to be on your radar.
It is quite easy for investors to put together a diversified TFSA portfolio of stocks and fixed-income investments that would generate an average yield of 6% right now. This would pay $5,280 per year on an individual TFSA of $88,000, or $10,560 for a Canadian couple.
That’s an average of $880 per month in tax-free passive income!
