Canadian investors are using their Tax-Free Savings Account (TFSA) to build portfolios of income-generating investments that can provide reliable tax-free earnings to complement employment and pension income.
TFSA advantage
The TFSA limit is 2023 is $6,500. This brings the cumulative total contribution room to $88,000 since the launch of the TFSA in 2009.
Interest, dividends, and capital gains generated inside the TFSA are all exempt from tax and the earnings are not counted as income when removed from the TFSA. That’s right; the full amount of the gains on the investments can go right into your pocket.
TFSA withdrawals open up equivalent new contribution room in the next calendar year in addition to the regular TFSA limit increase. This is helpful for people who might need to access a big chunk of the TFSA funds for a short period of time or will have new money to invest.
Guaranteed Investment Certificates (GICs) now offer good rates above 5% and deserve to be part of the mix. Top dividend stocks should still be a consideration for investors who want the flexibility to be able to access funds quickly and like the fact that dividend increases will boost the return on the initial investment.
Fortis
Fortis (TSX: FTS) is a good stock to own if you are concerned about a recession. The $65 billion asset base is focused on rate-regulated businesses that include power-generation facilities, electricity transmission networks, and natural gas distribution utilities.
Fortis grows through acquisitions and internal projects. The current $22.3 billion capital program is expected to significantly increase the rate base over five years. As a result, cash flow should expand enough to support average annual dividend hikes of at least 4% through 2027.
Fortis increased the dividend in each of the past 49 years. The distribution currently provides a 3.95% dividend yield. That’s lower than some other stocks, but the long-term total returns and the steady dividend growth make up for the smaller yield.
Canadian Natural Resources
Canadian Natural Resources (TSX: CNQ) has raised its dividend in each of the past 23 years with a compound annual dividend-growth rate averaging better than 20% over that timeframe.
CNRL is Canada’s largest oil and gas producer with a current market capitalization of close to $89 billion. The stock price picked up a nice tailwind in the past month, rising for $70 to $80 per share, but still trades below the 2022 high around $88.
Oil and natural gas demand is expected to remain strong for decades, even as the world transitions to renewable energy.
CNRL used the cash windfall from soaring energy prices in 2021 and 2022 to reduce debt, buy back stock, and increase the base dividend. The board also gave investors a bonus dividend of $1.50 per share last August. The current quarterly base dividend is $0.90 and provides an annualized yield of 4.5%.
Management intends to return more free cash flow to investors as net debt continues to fall. Another bonus payout could be on the way if oil prices extend their recent rebound.
The bottom line on top dividend-growth stocks
Fortis and CNRL pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks deserve to be on your radar.
