Canadian savers with self-directed Tax-Free Savings Accounts (TFSAs) are wondering which investments might be attractive right now for a portfolio focused on generating passive income or total returns.
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TFSA limit amount
The TFSA limit in 2024 is $7,000. This brings the maximum total TFSA contribution room to $95,000 for anyone who has qualified every year since the launch of the TFSA in 2009. In 2025 the TFSA limit will likely be $7,000, as well. This will bring the total maximum contribution space per person to $102,000.
The government raises the size of the annual TFSA limit by increments of $500 with the decision linked to the rate of inflation.
Income generated inside the TFSA on qualifying Canadian investments is tax-free. This means the full amount of the interest, dividends, or capital gains can be reinvested or removed and spent. Investors don’t have to worry about the TFSA earnings bumping them into a higher tax bracket or, in the case of seniors, putting them at risk of an Old Age Security (OAS) clawback if they already have net world income that is near or above the minimum threshold.
TFSA investments for income
Th type of investment to choose inside a TFSA depends on the goal for the fund. People who want 100% safety and are comfortable with lower returns might decide to put the $7,000 TFSA contribution in Guaranteed Investment Certificates (GICs). It is important to make sure you buy GICs from institutions that are Canada Deposit Insurance Corporation (CDIC) members and that you don’t exceed the $100,000 limit per issuer. Non-cashable GIC rates are currently in the 3% to 4% range depending on the term and the issuer.
Investors who are looking to get better potential returns and can handle some risk might decide to add dividend stocks to their TFSA portfolio. Companies that have long track records of paying dividends that increase steadily are usually good options. Each time there is a dividend increase the yield on the initial investment rises.
Bank of Montreal (TSX: BMO), for example, paid its first dividend in 1829 and has given shareholders a slice of the profits every year since. The bank has extensive operations in Canada and the United States, and continues to grow through acquisitions.
Investors who buy BMO stock at the current level can get a dividend yield of 4.8%.
Fortis (TSX: FTS) is another dividend stocks to consider. The board has increased the dividend for 51 consecutive years and intends to boost the distribution by 4-6% annually through at least 2029.
The current $26 billion capital program will raise the rate base from about $39 billion in 2024 to $53 billion in five years. As the new assets are completed and go into service the jump in cash flow should support the planned dividend growth.
The bottom line on top TFSA investments
TFSA investors have several options for generating income inside a self-directed portfolio. One popular strategy is to diversify the portfolio by laddering GICs with different terms and complementing this with some reliable dividend-growth stocks to bump up the average yield.
