Canadian Retirees: 2 Top Dividend Stocks for Tax-Free Passive Income

When establishing a reliable dividend income that can sustain you through retirement, it’s usually smart to stick to Aristocrats with solid business models.

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A significant percentage of Canadian retirees rely almost solely on government pensions, which is unfeasible given the current cost of living. However, an even larger segment relies upon a combination of their own retirement income and government pension. This may come from their savings and investments within a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA).

Both accounts have their own tax deferral strengths, but when it comes to starting a tax-free passive income, the TFSA is the natural choice.

An energy company

As one of the largest energy producers around the globe, the Canadian energy sector is quite strong, and energy stocks make up a sizable portion of the overall market. And while there are several compelling dividend payers in the sector, Enbridge (TSX:ENB) is one of the most obvious choices for many reasons.

It’s the largest Canadian energy company by market capitalization and has an impressive footprint. The massive pipeline network it controls transports about 30% of all the crude oil produced in North America and one-fifth of the natural gas consumed by the U.S.

The pipeline business model is even safer than a typical energy company because it’s not exposed to frequent price changes but long-term contracts.

As a dividend payer, Enbridge has an impressive history. It has raised its payouts for 29 consecutive years and offers one of the highest yields among energy stocks and Dividend Aristocrats — around 7.5%. At this rate, you can generate a sizable income from your TFSA without raising your tax burden.

A telecom company

Telus (TSX:T) is one of the most promising 5G stocks and the most diverse (operationally) telecom giant in Canada. While its primary businesses are the same as the other two telecom giants — i.e., wireless, wired, internet, and media, the company has also expanded its reach in the home security business, telehealth, and tech (through a subsidiary). This shows foresight for the upcoming Internet of Things (IoT) boom.

Telus is currently quite heavily discounted. It has lost over a third of its market valuation (about 36%), and it’s not alone in this regard. The telecom sector is going through some regulatory challenges right now. But on the plus side, the discount has beefed up its dividend yield tremendously — to about 6.8%. That’s an impressive number for a large-cap Aristocrat, especially considering the yield history of Telus.

  • We just revealed five stocks as “best buys” this month … join Stock Advisor Canada to find out if Enbridge made the list!

Foolish takeaway

The current yields of both these aristocrats are inflated thanks to the discounts they are trading at. That’s incentive enough from a dividend perspective, but the discount can also help you generate decent capital gains if you spend enough time (and have a healthy recovery).

As for when to buy, it might be smart to buy Enbridge fast since it’s already recovering, but you may consider waiting until it comes to Telus. An unfavourable regulatory decision can cause the stock to dip further.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge and TELUS. The Motley Fool has a disclosure policy.

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