Every eligible Canadian should make use of their Tax-Free Savings Account (TFSA) room. This year, the TFSA contribution limit is $6,500. If you can invest that amount for a 6% dividend yield, you’d get a respectable annual income of $390 tax free!
If you invested the same amount across these three stocks, you’d get an average yield of just over 6%.
Bank of Nova Scotia stock yields 7%
Big Canadian bank stocks are solid ideas for income. Currently, Bank of Nova Scotia (TSX:BNS) offers the most massive dividend yield of just over 7%. The international bank has been profitable through economic cycles.
Although its earnings are expected to drop meaningfully this fiscal year from higher loan-loss provisions, they should cover its dividends with leftovers. Its payout ratio may be stretched to about 60% of adjusted earnings versus its normal levels of about 50%. Moreover, Bank of Nova Scotia last reported retained earnings of almost $55.8 billion. This buffer can also help to protect its dividend.
In fact, the bank stock tends to increase its payout over time. For your reference, its 10-year dividend-growth rate is 6.4%.
At $60.53 per share at writing, Bank of Nova Scotia is a value play, trading at approximately 8.5 times adjusted earnings, whereas normally, it can trade at about 11.1 times. This represents a discount of about 23% from its long-term normal valuation. If this valuation expansion were to materialize, it can contribute to more than 30% of price appreciation. However, investors should expect a holding period of at least three years.
Brookfield Renewable Partners yields 6%
Brookfield Renewable Partners (TSX:BEP.UN) is another dividend growth stock that provides a big yield. The renewable power and decarbonization solutions company owns, operates, and invests in key technologies in the sector, including hydro, wind, solar, distributed generation, and storage.
There was significant interest in ESG (environmental, social, and governance) investing around 2021. From rising interest rates since 2022, the hot stock has cooled down and now trades at much more attractive levels. At $30.57 per unit, the recent analyst consensus price target suggests it’s undervalued by 32%. It also offers a lucrative cash distribution yield of 6%.
Importantly, BEP has increased its cash distribution for about 13 consecutive years with a 10-year dividend-growth rate of 5.7%. Management is committed to continuing healthy cash distribution growth of 5-9% per year.
Brookfield Infrastructure Partners yields 5.2%
Like its sister company, BEP, Brookfield Infrastructure Partners (TSX:BIP.UN) also maintains an investment-grade S&P credit rating of BBB+. Also, because of higher interest rates and a higher cost of capital, the global infrastructure stock trades at a compelling valuation after a selloff of close to 19% from this year’s peak.
Importantly, it remains well capitalized, thanks partly to asset sales of de-risked or mature assets, to take advantage of growth opportunities, primarily in the data and transport infrastructure sectors. It last reported available liquidity of US$2.3 billion.
BIP has increased its cash distribution for about 15 consecutive years with a 10-year dividend-growth rate of 9.1%. It intends for healthy cash distribution growth of 5-9% per year.
At $39.82 per unit, the recent analyst consensus price target suggests it’s undervalued by about 29%. It also offers a decent cash distribution yield of 5.2%.
In their TFSAs, investors can park their money in these dividend stocks that tend to increase their payouts over time. You can accumulate shares at good valuations today and never sell for growing passive income!
