The Tax-Free Savings Account (TFSA) has been a blessing for Canadian investors. The TFSA offers more than merely being a tax-sheltered savings account. Canadians can use the annually growing contribution room in their TFSAs to hold more than just cash. Canadians can enjoy tax-free earnings from any assets held within a TFSA, including stocks.
It means you can use your TFSA contribution room to enjoy tax-free wealth growth from interest income and returns from your stock market investments held within the account. A TFSA also protects your returns from capital appreciation and dividend income on assets held inside it.
With contribution room growing each year, you can continue building your TFSA portfolio to hold more shares of dividend stocks. Eventually, you can get your portfolio to the point where you can enjoy substantial tax-free income through shareholder dividends.
To this end, I will discuss two reliable TSX dividend stocks you can buy to build a solid foundation for such a TFSA portfolio.
Image source: Getty Images
Fortis
A successful dividend investing strategy involves buying dividend stocks that can fund growing dividend payouts for decades. Fortis (TSX: FTS) exemplifies TSX stocks with a reliable track record of dividend growth. Fortis is a Canadian Dividend Aristocrat and one of two Canadian Dividend Kings, boasting a 50-year dividend-growth streak.
The $26.28 billion market capitalization utility holdings company is a solid business that can comfortably fund its growing dividends for decades. Generating most of its revenue through long-term contracted assets in highly regulated markets, Fortis stock has predictable cash flows.
Even amid harsh economic environments, Fortis can earn recurring revenue due to the essential nature of its services. No matter what happens, people do not cut their utilities to cut costs, making Fortis stock a reliable income-generating stock.
As of this writing, Fortis stock trades for $53.57 per share, paying its investors a 4.41% dividend yield.
Enbridge
Enbridge (TSX: ENB) is a $102.22 billion market capitalization giant in the Canadian energy industry. The oil and gas sector is cyclical. This is why most energy stock typically lack the stability that utility stocks offer. However, Enbridge stock has an excellent defensive appeal to it due to its business model and position in the industry.
Enbridge is a Calgary-based multinational pipeline and energy company with an extensive pipeline network spanning throughout Canada and the United States. It is responsible for transporting a significant portion of hydrocarbons produced and consumed in North America, making it vital for the region’s economy.
The uncertainty for most energy stocks stems from volatile commodity prices. Enbridge stock generates income based on the volume of the hydrocarbons it transports, protecting it from volatility in commodity prices.
Its solid business model has allowed Enbridge stock to become a Canadian Dividend Aristocrat, having grown its payouts for over 25 years. With its growing renewable energy business, Enbridge is also future-proofing itself for the greener energy industry of tomorrow. As of this writing, Enbridge stock trades for $48.09 per share, boasting a juicy 7.61% dividend yield.
- We just revealed five stocks as “best buys” this month … join Stock Advisor Canada to find out if Fortis made the list!
Foolish takeaway
When earning through distributions from dividend stocks, you can also use the money to reinvest in more shares through dividend-reinvestment programs. This will let you buy more shares of dividend stocks within your TFSA without risking exceeding your contribution room. In turn, it can let you accelerate your long-term, tax-free wealth growth through the power of compounding.
Once your portfolio reaches a substantial size decades down the line, you can start withdrawing the dividends by treating your TFSA portfolio as a tax-free passive-income stream instead. To this end, Fortis stock and Enbridge stock can be reliable holdings to consider.
