Canadian investors have another $7,000 in Tax-Free Savings Account (TFSA) contribution room in 2025. With stock markets trading near record highs, investors are wondering where they can still find good value and get decent returns on their hard-earned savings.
Source: Getty Images
TFSA 101
The government created the TFSA in 2009 to give Canadians an extra tool to invest and save for future financial projects. Since inception, the cumulative maximum contribution space in a TFSA has grown to $102,000 per person. This is large enough to build a decent retirement fund that can complement a person’s company pension, Canada Pension Plan, Old Age Security (OAS), and Registered Retirement Savings Plan (RRSP).
All dividends, interest, and capital gains earned inside a TFSA on qualifying investments are tax-free and can be fully used to reinvest or removed as tax-free income. This is helpful for anyone who is in a higher tax bracket. It is also good for retirees who want to avoid or minimize the OAS pension recovery tax.
GICs or dividend stocks?
Rates offered on Guaranteed Investment Certificates (GICs) were as high as 6% in 2023 but have come down steadily with the reductions in interest rates by the Bank of Canada. At the time of writing, most non-cashable GICs are paying 3% to 3.5%, depending on the term. That’s still better than the current rate of inflation and provides a risk-free source of income.
Dividend yields on some top TSX stocks are quite a bit higher than current GIC rates. However, owning stocks comes with the risk that the share price can drop below the purchase price, and dividends sometimes get cut if a company gets into financial trouble.
That being said, there are a number of TSX dividend stocks that have increased payouts annually for decades and should continue to raise their distributions. Enbridge (TSX:ENB), for example, has increased its dividend in each of the past 30 years.
The company is working on a $27 billion capital program to drive growth. Extra cash flow from the new assets should support additional dividend hikes. Investors who buy ENB stock at the current price can get a dividend yield of 6%.
Fortis (TSX:FTS) is another stock to consider for dividend growth. The board has increased the distribution annually for the past 51 years. Fortis has a $26 billion capital program underway that will raise the rate base from close to $39 billion in 2024 to $53 billion in 2029. Management expects the resulting boost to cash flow to support planned annual dividend increases of 4% to 6%.
At the time of writing, Fortis provides a dividend yield of 4.2%. That’s still better than a GIC, and the yield on the initial investment rises with each dividend increase.
The bottom line on TFSA investing
The best mix of GICs and dividend stocks is different for every person depending on the return they need to get, their comfort level with risk, and the required liquidity in the investments.
In the current market conditions, investors can quite easily put together a diversified portfolio of GICs and dividend stocks to get an average yield of 4%. That’s comfortably above the current rate of inflation.
