Canadian retirees are getting hit hard by high inflation. This is driving a search for better returns on savings to help offset the jump in living costs. One popular strategy for generating better passive income involves owning top TSX dividend stocks inside a Tax-Free Savings Account (TFSA).
TFSA limit increase
The TFSA limit will rise from $6,500 in 2023 to $7,000 in 2024. This means the current cumulative maximum contribution space of $88,000 will jump to $95,000 next year. For pensioners with ample savings to make the full contributions the benefits of earning passive income inside the TFSA instead of inside a taxable investment account can be significant.
All interest, dividends, and capital gains generated inside the TFSA are tax-free and can go straight into your pocket. In addition, the Canada Revenue Agency does not count the TFSA earnings when calculating net world income to determine the Old Age Security (OAS) pension recovery tax. Net world income above $86,912 in 2023 triggers a 15% OAS clawback. That means a person with an income of $96,912 in 2023 would see OAS get cut by $1,500 next year.
Dividend stocks have taken a beating in the past six months due to rising interest rates. The peak for rates is likely on the horizon, if not already reached, and cuts could be on the way next year. In that scenario, the share prices of top dividend stocks could surge.
For the moment, many leading TSX dividend payers still look cheap and offer high yields.
Enbridge (TSX:ENB) increased its dividend in each of the past 28 years. The company is on track to hit its 2023 financial guidance and recently announced a large acquisition that should help drive revenue and cash flow growth.
Enbridge is buying three natural gas utilities in the United States for US$14 billion. The businesses generate reliable rate-regulated revenue and come with growth opportunities. Enbridge has raised the capital program to $24 billion.
The stock trades for less than $46 at the time of writing compared to $59 at one point last year. Investors who buy ENB stock at the current price can get a 7.75% dividend yield. Dividend growth has been about 3% in each of the past two years. Ongoing hikes in the 3-4% range should be reasonable to expect. At the very least, the payout should be safe.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) raised its dividend earlier this year, even as the bank sector faces headwinds. High interest rates are putting some borrowers in a difficult situation, and that led Bank of Nova Scotia to boost its provision for credit losses (PCL) to roughly $800 million in the fiscal third quarter (Q3) of 2023 compared to about $400 million in fiscal Q3 2022.
This is still a very small amount relative to the total loan portfolio, and the bulk of the loan book remains in good shape. Bank of Nova Scotia has a solid capital cushion to ride out difficult times and is still very profitable.
Bank stocks recently caught a nice tailwind as bargain hunters swooped in on bets that the Bank of Canada is done raising interest rates and will have to start cutting rates next year. Bank of Nova Scotia trades near $60.50 at the time of writing compared to more than $90 in early 2022, so there is decent upside potential on a rebound.
Investors can currently get a 7% yield from BNS stock.
The bottom line on top stocks for passive income
Enbridge and Bank of Nova Scotia are good examples of top TSX stocks offering high yields and dividends that should continue to grow. If you have some cash to put to work in a portfolio targeting passive income, these stocks deserve to be on your radar.