Canadian retirees are searching for ways to get better returns on their savings without being bumped into a higher tax bracket or getting hit with an Old Age Security (OAS) pension clawback. One strategy for generating tax-free income is to hold top TSX dividend stocks inside a Tax-Free Savings Account (TFSA).
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TC Energy
TC Energy (TSX: TRP) recently wrapped up the spin-off of its oil pipelines division, South Bow. The move unlocked value for investors and cleared the way for TC Energy to focus primarily on growing its natural gas infrastructure business and the power generation assets.
TC Energy completed the $14.5 billion Coastal GasLink project late in 2023. The 670 km pipeline will carry natural gas from Canadian producers to a new liquified natural gas (LNG) export facility being built on the coast of British Columbia. Commercial operation is expected to begin in 2025. This will provide TC Energy with a revenue boost. In addition, TC Energy has a capital program on the go that will see the company invest about $6 billion per year over the medium term. As new assets are completed and go into service, the added cash flow should support steady dividend growth.
TC Energy raised the dividend in each of the past 24 years. Investors who buy TRP stock at the current level can get a dividend yield of 5.9%.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) trades near $72.50 at the time of writing compared to $93 at one point in early 2022. The stock slipped as low as $55 about a year ago, so investors who had the courage to jump in at that point are already sitting on some nice gains. More upside, however, could be on the way in 2025.
Bank of Nova Scotia raised its provisions for credit losses (PCL) in recent quarters as high interest rates started to put borrowers with too much debt in a tight spot. The move by the Bank of Canada to cut interest rates in the past few months should bring relief to businesses and households that are struggling to pay their debts. Interest rates are expected to continue to decline through next year as the central bank tries to navigate a soft landing for the economy. This should lead to lower PCL at Bank of Nova Scotia, which will improve profits and can free up more cash for growth initiatives.
Bank of Nova Scotia’s share price underperformed its large Canadian peers in the past five years. This might change going forward as the bank unfolds a strategy shift that will see it allocate capital investments to opportunities in the United States, Canada, and Mexico rather than South America where the bank previously spent billions of dollars on acquisitions to build a large presence in Peru, Colombia, and Chile.
Investors who buy BNS stock at the current level can get a dividend yield of 5.8%.
The bottom line on top stocks for passive income
TC Energy and Bank of Nova Scotia pay attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed TFSA focused on passive income, these stocks deserve to be on your radar.
