Canadians are searching for ways to get passive income and generate solid total returns from their self-directed Tax-Free Savings Account (TFSA). The market correction that has occurred in some sectors over the past year is giving investors a chance to buy great Canadian dividend stocks at cheap prices. Rates on Guaranteed Investment Certificates (GICs) are also at attractive levels.
TFSA limit
The TFSA limit is $6,500 in 2023. That brings the maximum cumulative total TFSA contribution space to $88,000. Unused room can be carried forward to future years. In addition, any funds removed from the TFSA during a year will open up equivalent new contribution space in the following calendar year.
GIC or dividend stocks for TFSA passive income
The jump in interest rates over the past 18 months has resulted in a nice boost to the rates financial institutions will pay on GICs. At the time of writing, investors can get rates above 5% on multi-year GICs from Canada Deposit Insurance Corporation (CDIC) members. This might be adequate to meet a person’s investing needs if they are risk averse, are comfortable with a 5% return, and do not require access to the invested funds during the term of the GIC.
Owning stocks carries risks. The share prices of top dividend stocks have dropped considerably over the past year. At this point, the pullback looks overdone, and investors can get yields above 6% or 7% from companies that have increased their payouts for decades. The risk is that the stock price might fall further, and dividends can get cut if the company gets into financial trouble.
Investors who can handle the added risk, however, have the opportunity to get a high yield on the initial investment and benefit as the dividend increases. Top dividend-growth stocks typically rebound from market slumps, so there is an opportunity to generate capital gains if the stock price bounces.
Stocks like Telus (TSX:T) and TC Energy (TSX:TRP) have increased their dividends annually for more than 20 years and now offer yields of 6.2% and 7.7%, respectively.
Both companies have core revenue streams that should hold up well during a recession.
Telus gets most of its revenue from essential mobile and internet subscription services. The company expects consolidated operating revenue to increase in 2023. Telus trades below $24 at the time of writing compared to more than $34 at the 2022 high.
TC Energy has a $34 billion capital program that should support planned dividend increases in the 3-5% range annually over the next few years. The company’s natural gas transmission infrastructure in Canada, the United States, and Mexico positions the business well to benefit from rising demand for natural gas in both domestic and international markets, as utilities switch to natural gas from coal to produce electricity.
The bottom line on TFSA investing
Investors have to choose the mix that is best for their own TFSA savings goals. At this point, it might make sense to build a diversified portfolio of GICs and top dividend-growth stocks to reduce risk while increasing yield and providing a shot at some decent capital gains.
