Soaring living costs are pushing Canadian retirees to search for ways to get better returns on their hard-earned savings. One popular strategy involves buying quality high-yield dividend stocks inside a self-directed Tax-Free Savings Account (TFSA).
Challenges for pensioners
Government and defined-benefit pensions are adjusted for average inflation, but the increases might not keep up with the individual hikes in living costs faced by many Canadian retirees. Rent increases, mortgage increases, hikes to insurance rates and property taxes, and rising energy costs, among other things, are putting pressure on retirement budgets.
Some retirees are working part-time to cover additional expenses, but this income can put the Old Age Security (OAS) pension at risk of a clawback if the person’s net world income tops the minimum threshold. The amount to watch in the 2024 income year is $90,997. This sounds like good pension income, but the Canada Revenue Agency (CRA) takes a large chunk, and what remains could still make budgets a bit tight at the end of the month, especially if retirees are carrying debt.
The OAS pension recovery tax is 15 cents on every dollar earned above the minimum threshold. As an example, a retiree who collects OAS and has a net world income of $100,997 in 2024 would see a $1,500 reduction in the OAS paid during the July 2025 to June 2026 payment period. That’s a meaningful hit for someone who is already tight for cash.
TFSA benefit
Holding income-generating investments inside a TFSA is a good way to get tax-free passive income that won’t put OAS at risk of a clawback. Investors who don’t want to take on any risk might decide to simply own Guaranteed Investment Certificates (GICs). Rates are down from last year, but investors can still get 4-5% on non-cashable GICs.
Dividend stocks that took a beating over the past two years now look cheap and many offer yields that are much higher than GIC rates. Owning stocks carries risk as the price of the shares can fall below the price paid for the stock. On the upside, dividend growth gradually increases the yield on the initial investment.
No dividend is 100% safe, but stocks that have long track records of dividend growth tend to be solid picks.
Enbridge (TSX:ENB), for example, has increased its dividend annually for the past 29 years. The company continues to grow through acquisitions and capital projects and expects distributable cash flow to rise by at least 3% annually over the next few years. This should support steady dividend growth in the same range.
Enbridge trades near $49.50 at the time of writing. The stock is off the 12-month low near $43 and should continue to drift higher once the U.S. Federal Reserve starts cutting interest rates. Enbridge traded nearly $59 two years ago, so there is decent upside potential. Investors who buy the stock at the current level can get a yield of 7.4%.
TC Energy (TSX:TRP) is another energy infrastructure player that looks undervalued and pays a great dividend. The board has increased the distribution in each of the past 24 years, and investors should see annual dividend growth in the 3-5% range.
TC Energy has made good progress in shoring up its balance after the budget for its 670-km Coastal GasLink project more than doubled to roughly $14.5 billion. Coastal GasLink should be in commercial operation in 2025, and TC Energy has a number of other projects lined up to drive cash flow growth.
TRP stock fell from $74 in 2022 to around $44 last year. The share price is back up to $55 at the time of writing, and more upside is likely as interest rates decline. Investors can still get a yield near 7% from the stock.
The bottom line on top stocks for passive income
Enbridge and TC Energy pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA focused on passive income, these stocks deserve to be on your radar.
