Canadian retirees and other Tax-Free Savings Account (TFSA) investors seeking reliable passive income have a rare opportunity to get attractive yields from both Guaranteed Investment Certificates (GICs) and top TSX dividend stocks.
The government launched the TFSA in 2009 as an extra vehicle to help Canadians put more money aside to meet their financial goals. The TFSA contribution limit in 2023 is $6,500. This brings the total maximum contribution space to $88,000 for anyone who has qualified every year.
The TFSA limit is indexed to inflation and increases by increments of $500. The 2024 TFSA limit will be at least $6,500. Contribution space that is not used can be carried forward to future years. In addition, any money removed from the TFSA during the year will open up equivalent new room in the following calendar year.
All profits generated inside the TFSA on investments can be removed tax-free. This is a big benefit for people who are in high marginal tax brackets. Seniors who collect Old Age Security (OAS) pensions also don’t have to worry about the income causing a clawback on their OAS payments.
Are GICs or dividend stocks better for passive income?
GICs are better for people who don’t want to take on any risk to their savings and are comfortable not having access to the invested funds during the term of the GIC. At the time of writing, investors can get GIC rates between 5.1% for five-year GICs and 5.6% for one-year GICs from issuers that are Canada Deposit Insurance Corporation (CDIC) members. That might be enough to meet your income goals.
Investors who want a higher yield, need access to the invested capital and can handle volatility in the share prices of stocks might prefer to buy high-yield dividend growth stocks that now trade at discounted prices.
For example, Enbridge has increased its dividend for 28 consecutive years and now provides a 7.6% dividend yield.
TC Energy has raised its dividend annually for more than two decades and now offers a yield of 7.5%.
Banks and communications stocks also appear oversold. Bank of Nova Scotia increased its dividend earlier this year and provides a 6.6% yield right now. BCE has a yield of 7%.
The bottom line on top investments for TFSA passive income
GIC rates will only stay this high as long as the Bank of Canada continues to raise interest rates. The moment the central bank indicates it has achieved its goal of reducing inflation and starts to cut rates again, GIC rates will fall.
Dividend stocks currently appear oversold. This is why the yields are so high. As soon as interest rates begin to move lower, dividend stocks should catch a new tailwind.
Today, investors can quite easily put together a diversified portfolio of laddered GICs and top dividend stocks to get an average yield of 6.25%. On a $40,000 TFSA, this would generate $2,500 per year in tax-free passive income. That’s better than $200 per month!