Slow and steady wins the race when it comes to building retirement wealth. Investors in all stages of their careers can take advantage of their Tax-Free Savings Account (TFSA) limit to build portfolios of diversified investments that will generate reliable streams of income to go along with other pension payments.
The maximum cumulative TFSA contribution space per person is $88,000 in 2023. The TFSA limit increase for 2024 will be at least $6,500.
Should you buy GICs or dividend stocks?
Investors who don’t want to take on any risk should put their money in Guaranteed Investment Certificates (GICs) that are issued by Canada Deposit Insurance Corporation members. GIC rates are now as high as 5.5% for a one-year term and better than 5% for up to five years. That might be all you need.
However, the downside of a GIC is that you don’t have access to the principal in the event you need cash for an emergency. In addition, the rate is fixed for the term of the certificate. People who bought five-year GICs paying 2% rates in 2021 thought they were getting a good deal, but are now are now kicking themselves for missing out on better returns.
Owning dividend stocks comes with risk. The share price can fall below the purchase price, and companies that get into trouble sometimes cut or cancel the dividend. When that happens, the share price usually stays under pressure for a long time.
On the positive side, good dividend-growth stocks tend to rebound after a market correction, and the increase in the dividend each year raises the return on the initial investment. Stocks can also be sold quickly if you have to cash out to access the funds.
Top TSX dividend stocks now trade at discounted prices, and many offer yields that are above current GIC rates.
A mix of GICs and dividend stocks is probably the best option for most investors who want to get above-average TFSA returns, but don’t want to take on too much risk with their retirement savings.
Top Canadian dividend-growth stocks
A number of Canadian companies that normally raise their dividend annually now offer very high dividend yields. In the current environment of economic uncertainty, it makes sense to seek out stocks that generate steady revenue in all economic conditions.
BCE
BCE (TSX:BCE) is Canada’s largest communications firm with a current market capitalization near $52 billion. The share price is below $58 at the time of writing compared to more than $70 at the high point in 2022.
Higher borrowing costs will put pressure on earnings this year, and BCE’s media group is going through a restructuring to address falling ad spending by customers. These issues could persist for some time, but the overall picture for BCE’s revenue and cash flow is positive, supported by the core wireless and wireline network revenues.
Mobile and internet subscriptions are sticky revenue streams. Households and businesses need to stay connected to friends, family, and customers, regardless of the state of the economy.
BCE expects total revenue and free cash flow to grow in 2023. This should support a solid dividend increase for 2024. The board has raised the dividend by at least 5% annually for the past 15 years.
At the time of writing, BCE stock offers a 6.7% dividend yield.
The bottom line on TFSA income
BEC is a good example of a top TSX dividend stock that looks oversold. Some dividend-growth stocks actually have yields above 7% right now. An investor can quite easily combine investments in GICs and dividend stocks to get an average yield of 6.3% today.
On a TFSA of just $22,000, the 6.3% return would generate $1,386 per year in tax-free earnings. That works out to $115.50 per month!
