Canadian retirees are looking for ways to get the most income from their savings without taking on too much risk.
TFSA passive income
The Tax-Free Savings Account (TFSA) is a good tool for Canadian seniors to use to generate tax-free income. All interest, dividends, and capital gains generated inside the TFSA can go straight into your pocket, and retirees who received the Old Ages Security (OAS) pension don’t have to worry about the extra income triggering the OAS clawback.
The TFSA limit in 2023 is $6,500. This brings the cumulative maximum contribution space per person to $88,000. That’s a large enough portfolio to generate meaningful tax-free passive income.
Best TFSA investments?
Guaranteed Investment Certificates (GICs) now pay rates above 5%. If that is enough to meet your income goals, there is no reason to buy stocks and take on principal risk.
That being said, investors who can handle some volatility and are seeking better and growing returns on their savings might want to add top dividend-growth stocks to their holdings. The market correction over the past year has driven down share prices of great Canadian dividend stocks to the point where they now appear oversold and offer attractive yields above GIC rates.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) is a contrarian pick in the Canadian financial sector. The bank’s share price has underperformed its Big Five peers over the past few years, but changes are likely on the way that could get the bank back on track.
A new chief executive officer is conducting a strategic review of the bank’s operations. Investors probably won’t get any major news on an overhaul before late 2023 or early 2024, but pundits are already speculating on potential strategy shifts.
Bank of Nova Scotia wants to boost its presence in British Columbia and Quebec, where it feels there is a good opportunity to grow. On the Quebec front, the recent revelation that Laurentian Bank (TSX: LB) is potentially for sale could be the opportunity to make a big move into the province in one acquisition.
Funding for acquisitions could come from the sale of other business units. Bank of Nova Scotia’s international group is heavily focused on Mexico, Peru, Chile, and Colombia. In his address to shareholders earlier this year, Bank of Nova Scotia’s chief executive officer commented on the importance of Mexico, so that market will likely remain part of the mix. The operations in the other three members of the Pacific Alliance, however, might end up being sold and the funds allocated to new growth opportunities.
For the moment, investors can buy BNS stock at just $67 per share compared to more than $90 in early 2022. The board recently increased the dividend, so there doesn’t appear to be too much concern about near-term revenue and profits. Investors who buy Bank of Nova Scotia at the current price can get a 6.3% dividend yield.
The bottom line on TFSA passive income
Bank of Nova Scotia is just one example of a top TSX dividend stock that now offers an attractive yield and a growing distribution. Retirees can quite easily put together a diversified TFSA portfolio of GICs and high-yield stocks to get an average return of 5.75% right now.
A TFSA of $88,000 would generate $5,060 per year in tax-free passive income. That averages out to more than $421 per month!
