Retirees and other Canadian investors can use their Tax-Free Savings Accounts (TFSAs) to generate tax-free passive income to help fight the impact of inflation.
GICs and dividends
Canada’s rate of inflation dipped to 2.8% in June 2023. That’s much better than 8.1% in the same month last year. Investors can now generate returns on saving that outpace the latest inflation figure. This is good news for pensioners and anyone else who has been feeling the pinch from the soaring cost of living.
The shift is the result of the steep increase in interest rates. Investors now have a chance to get rates of better than 5% on Guaranteed Investment Certificates (GICs). At the same time, the market correction is driving down the share prices of many top dividend stocks to the point where they look oversold and offer above-average dividend yields.
TC Energy
TC Energy (TSX: TRP) trades near $51 per share at the time of writing compared to more than $70 at the high last year.
The pullback looks overdone, even as TC Energy faces higher borrowing costs to fund projects and is trying to wrap up its massive Coastal GasLink development that is way over budget. The company expects the pipeline to cost at least $14.5 billion. That’s more than double the original estimate. However, the project was nearly 90% complete as of the first-quarter (Q1) earnings report, so there should be light at the end of the tunnel.
TC Energy’s total capital program is currently $34 billion. Management still expects the new assets to generate enough cash flow growth to support planned annual dividend increases of at least 3% over the medium term. TC Energy has increased the payout annually for more than two decades.
Investors who buy TRP stock at the current level can get a 7.3% dividend yield and wait for the distribution increases to boost the return on the initial investment.
BCE
BCE (TSX: BCE) increased the dividend by at least 5% in each of the past 15 years. The company expects revenue and free cash flow to grow in 2023, so there should be another good dividend increase on the way for 2024.
BCE generates core revenue from essential mobile and internet service subscriptions. The company has the financial firepower to make the billion of dollars of investments needed to upgrade its wireless and wireline network infrastructure. This enables BCE to earn more revenue from new services and upgraded packages. It also helps BCE protect its competitive position.
Earnings will probably fall in 2023 due to higher borrowing costs and challenges facing the media business, but the drop in BCE stock from more than $70 last year to the current price near $58 looks exaggerated.
Investors who buy the dip can get a 6.7% dividend yield at the time of writing.
The bottom line on TFSA passive income
The cumulative TFSA contribution limit is now $88,000 for anyone who has qualified since the TFSA’s launch in 2009. It is quite easy for investors to put together a diversified portfolio of GICs and dividend stocks today that would generate an average yield of 6%.
On a TFSA of $88,000, this would generate $5,280 per year in tax-free passive income. That averages out to more than $101.50 per week!
