Canadian pensioners are getting hammered by inflation as price increases on essentials like fuel, insurance, and food often outpace the income boost they receive on their government or defined-benefit company pensions.
As such, many retirees are searching for ways to get better returns on their savings. One popular investing strategy for passive income involves buying top TSX dividend stocks inside a Tax-Free Savings Account (TFSA).
TFSA benefits
The TFSA limit is $6,500 in 2023 and will be at least that amount again in 2024. Canadians who have qualified for TFSA contributions every year have as much as $88,000 in cumulative TFSA contribution space.
All income earned on investments held inside the TFSA is tax-free and can be removed from the TFSA at any time. The income does not bump a person into a higher tax bracket and is not used by the Canada Revenue Agency to calculate net world income that determines if a person will be hit by the Old Age Security (OAS) pension recovery tax.
Best stocks for passive income
In the current economic environment, it makes sense to search for companies that have long track records of dividend growth that should continue through economic downturns.
Fortis (TSX:FTS) is a good example of a stock that generates a steady stream of growing dividends. The board recently announced a 4.4% increase to the distribution, marking the 50th consecutive year of dividend increases.
Fortis gets nearly all of its revenue from rate-regulated assets that include power-generation facilities, electric transmission networks, and natural gas distribution utilities. The company is working on a $25 billion capital program that will significantly boost the rate base through 2028. Fortis expects cash flow to increase enough to support planned annual dividend increases of at least 4% over the next five years.
The stock trades close to $54.50 at the time of writing compared to more than $64 at the peak last year. The dividend yield is about 4.4%, which is lower than other top dividend stocks, but the steady dividend growth and the quality of the revenue stream make Fortis an attractive pick.
Enbridge
Enbridge (TSX:ENB) raised its dividend in each of the past 28 years. The energy infrastructure giant is widely known for its vast oil pipeline network that carries 30% of the oil produced in Canada and the United States.
In recent years, Enbridge has shifted investments to its other divisions to diversify the revenue stream and prepare the business to benefit from future energy trends. Enbridge purchased an oil export terminal in Texas and has a stake in the Woodfibre liquified natural gas (LNG) export facility being built in British Columbia to take advantage of growing international demand for oil and natural gas.
Enbridge purchased a developer of solar and wind energy infrastructure last year to boost its renewable energy capacity.
In recent weeks, Enbridge announced a US$14 billion deal to buy three American natural gas distribution utilities. Hydrogen is expected to be a key fuel in the future and can be distributed through natural gas infrastructure.
Revenue contributions from the new businesses and Enbridge’s capital program should support steady dividend growth in the coming years. Investors who buy Enbridge on the latest dip can now get a dividend yield of 8%.
The bottom line on top stocks for passive income
Fortis and Enbridge are good examples of top dividend-growth stocks that now look oversold. If you have some cash to put to work in a TFSA targeting passive income, these stocks deserve to be on your radar.
