Canadian retirees are searching for ways to get better returns on their savings. The pullback in the share prices of some top TSX dividend stocks over the past two years is giving self-directed Tax-Free Savings Account (TFSA) investors a chance to get good yields for portfolios focused on passive income.
TFSA benefits
The TFSA contribution limit in 2024 is $7,000. This brings the maximum cumulative TFSA contribution space to $95,000 per person. All interest, dividends, and capital gains earned inside the TFSA are tax-free. This means the full amount can be removed as income or reinvested to grow the portfolio.
Retirees who have high pension income and collect the Old Age Security (OAS) pension get an added benefit by earning passive income from a TFSA instead of from a taxable investing account. The Canada Revenue Agency (CRA) does not count TFSA earnings when it calculates net world income that is used to determine the OAS pension recovery tax, also known as the OAS clawback. When net world income tops a minimum threshold, the CRA implements a 15% OAS recovery tax on every dollar above the target amount. In the 2024 income year, the net world income amount is $90,997. This means a pensioner with a net world income of $100,997 in 2024 would see their total OAS payment reduced by $1,500 for the July 2025 to June 2026 payment period.
When possible, it makes sense to avoid this hit.
Good stocks for TFSA passive income
Owning dividend stocks carries risks. Share prices can fall below the purchase price and dividends sometimes get cut if a company runs into financial troubles. However, when top dividend-growth stocks go on sale, investors can pick up high yields and get paid well to wait for a rebound.
TC Energy (TSX:TRP), for example, trades near $51 per share at the time of writing compared to $74 at the stock’s peak in 2022. The company generated strong results in 2023 despite headwinds from high interest rates and soaring expenses on a major development project. TC Energy’s Coastal GasLink pipeline is now complete and management is focused on the rest of the capital program that is expected to drive adequate cash flow growth to support annual dividend increases of 3-5% over the medium term. TC Energy has given investors an annual dividend increase for more than 20 consecutive years. At the time of writing, the stock provides a 7.5% dividend yield.
TC Energy is a major player in the natural gas storage and transmission sector. Natural gas demand is expected to soar in the coming years. The fuel will be required for generating reliable electricity needed to power data centres.
Telus (TSX:T) trades near $22.50 at the time of writing compared to around $34 two years ago. The drop is primarily due to the jump in interest rates. Telus uses debt to fund part of its capital program. In 2024, the company expects to invest about $2.6 billion in capital projects. Higher borrowing costs can eat into profits.
In addition, Telus reduced its 2023 guidance in the summer of last year after its Telus International subsidiary saw revenue slide in the first half of the year. The division improved through the fourth quarter of 2023 and is expected to deliver a better performance in 2024. Overall, Telus still reported solid growth in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) last year, and decent results are projected for 2024.
As a result, the pullback in the stock is probably overdone. Investors who buy Telus at the current level can get a 6.7% dividend yield.
The bottom line on top stocks for passive income
TC Energy and Telus pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA portfolio targeting passive income, these stocks deserve to be on your radar.
