Canadian pensioners and other investors seeking passive income can use their Tax-Free Savings Account (TFSA) to build diversified portfolios of top TSX dividend stocks and Guaranteed Investment Certificates to create high-yield portfolios.
TFSA limit
The TFSA limit is $6,500 for 2023. In 2024 it will increase by at least another $6,500. This will boost the cumulative total TFSA contribution space from a maximum of $88,000 per person this year to maximum TFSA room of $94,500 in 2024.
All dividends, interest, and capital earned inside the TFSA and taken out as earnings are all tax-free. In addition, any amount removed from the TFSA opens up equivalent new contribution room in the following calendar year, along with the regular increase to the TFSA limit.
The Canada Revenue Agency doesn’t count TFSA earnings when it calculates net world income that is used to determine the Old Age Security (OAS) pension recovery tax. This is important for seniors who worry about investment income putting their Old Age Security Pension (OAS) at risk of a clawback.
Best TFSA investments?
Rates on Guaranteed Investment Certificates (GICs) are now above 5%. That makes them attractive for portfolios focused on passive income. If you don’t want to take on any principal risk and are happy with a 5% return, GICs are the way to go today.
Investors who want higher yields and can ride out some market turbulence should consider making top TSX dividend stocks part of the TFSA mix. The market correction that has occurred in some segments of the TSX over the past year is driving up yields on top dividend-growth stocks to generous levels.
BCE
BCE (TSX: BCE) is a good example of a top Canadian dividend stock that raises its distribution regularly and now trades a large discount to the 2022 highs. At the time of writing, investors can buy BCE stock for close to $58 per share compared to more than $70 in April last year.
The dip looks overdone, even as BCE is expected to see profits decline this year due to soaring interest rates and a weakening ad market. BCE’s core mobile and internet subscription revenues should hold up well if there is a recession, and the company is predicting a gain in revenue and free cash flow this year compared to 2022.
BCE normally increases the dividend by about 5% annually. Investors can now get a 6.7% dividend yield from the Canadian communications giant.
TC Energy
TC Energy (TSX: TRP) also traded for more than $70 per share at one point last year. Investors can now buy the stock for close to $51 and get a 7.3% dividend yield.
The board has increased the dividend annually for more than 20 years and intends to give investors a raise of at least 3% per year over the medium term. Higher revenue and cash flow are expected to come from the $34 billion capital program, as new assets are completed and go into service.
TC Energy’s natural gas transmission and storage network spans Canada, the United States, and Mexico. Natural gas has a bright future both in the domestic and international markets. Utilities are switching from coal and oil to natural gas to produce electricity. Gas-fired plants will remain key suppliers of reliable power, even as the world transitions to renewable energy.
The bottom line on TFSA passive income
A number of great Canadian dividend stocks currently offer yields of better than 6%. Some, like TRP, are even above 7% right now. A diversified portfolio of GICs and quality dividend-growth stocks could quite easily provide an average return of 6.25% today. On a TFSA of $88,000 this would generate $5,500 per year in tax-free income.
That averages out to more than $458 per month!
