A core concept behind the tax-sheltered Registered Retirement Savings Plan (RRSP) is to allow Canadian investors to grow their savings through investments without incurring any tax burden until they retire. As retirees, they should be in a low enough tax bracket that the tax burden is now lower on the retirement income they generate from their RRSP or a Registered Retirement Income Fund (RRIF).
So, the goal is to keep the tax burden as low as possible during your retirement years to prevent it from eating away at your retirement income. A Tax-Free Savings Account (TFSA) can play a crucial role in this regard, because any dividend income you generate from your TFSA would be tax-free.
A smart investor can significantly increase the size of their stake in a good dividend payer through the dividend-reinvestment-plan mechanism, so when it’s time to cash out the dividends, they can receive a considerable tax-free income, allowing them to sustain a financially healthy lifestyle without increasing their tax burden.
A utility company
One stock that may offer not just a tax-free income from your TFSA but also a worry-free income stream is Fortis (TSX:FTS). The utility company caters to over 3.4 million electrical and gas utility customers in 10 different markets, and 99% of its revenues come from regulated utility assets, augmenting the safety/security of its dividends.
Its payout history is another endorsement of its dividend potential. The company has been raising its payout for more years than most companies have paid dividends. It’s paid a dividend for 49 years — just one year away from being counted among the Dividend Kings in the world.
The company is currently offering a relatively modest 4% yield to its investors — a result of the slight discount it is trading at. The capital-appreciation potential of the stock is not on par with pure growth stocks, but it’s still decent enough, especially in the long run, which makes it a valuable investment from more than just a dividend perspective.
A telecom company
BCE (TSX:BCE), the largest telecom company in Canada (by market cap), is also the most generous dividend-paying 5G stock in the country right now. Thanks to a 20% discount the stock is currently trading at, the yield has gone up to an attractive level of 6.5%, and the valuation is quite fair.
At this rate, the company can help you generate a $270 monthly dividend income with $50,000 invested. Its dividends are not attractive but also stable and reliable. BCE has been growing its payouts for almost 14 years, and even though it’s not as long a history as Fortis, it’s a strong enough endorsement of the company’s commitment to keep raising its payouts.
The payout ratio is relatively high right now, but it’s more likely to result in a less-generous dividend growth in the coming year rather than a dividend cut or dividend suspension.
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Foolish takeaway
The two leaders in their respective industries offer you more than just reliable dividend income — they also offer long-term stability and modest capital-appreciation potential.
Adding them to your TFSA portfolio would be a good move at any given time, but an ideal time to buy them would be a slump like the one BCE is experiencing right now. This will enhance the growth potential, and you will also lock in a higher yield, increasing the size of the tax-free retirement income.
