How I’d Allocate My $7,000 TFSA Contribution for Optimal Returns

The Tax-Free Savings Account (TFSA) has been a true blessing for savvier Canadian investors who are using it to its fullest potential. While its name suggests it’s a mere savings account, I think most seasoned investors will agree that the best use you can get out of it is as an account to hold investments.

You can store cash in a TFSA and grow your wealth using interest returns without incurring taxes. However, cash isn’t the only thing you can hold in the account. Instead of cash, you can buy and hold income-generating assets like dividend stocks in a TFSA.

Allocating a portion of your TFSA contribution room to dividend stocks can let you generate higher income than with interest on cash. Reinvesting your dividends to grow your position in a stock can let you accelerate your tax-free wealth growth through the power of compounding. The key to successfully pulling this off for long-term success is identifying and investing in high-quality dividend stocks.

To this end, here are two TSX dividend stocks you can consider holding in your TFSA.

BCE

BCE (TSX:BCE) is one of the Big Three companies in the Canadian telecom space. The $26.99 billion market-cap company is a wireless and internet service provider. It offers wireless, broadband, television, and landline phone services in Canada. It also has a sizeable media segment that holds digital media, radio, and television assets that diversify its revenue streams further. To make things even better, BCE is also responsible for licensing the Canadian rights to several top movie channels.

As of this writing, BCE stock trades for $29.59 per share and boasts an inflated 13.5% dividend yield. The company’s share price has dipped due to headwinds and macroeconomic factors. There is a high risk of a dividend cut to make its cash flow sustainable. However, the company will compensate investors by offering a discount on its dividend-reinvestment plan (DRIP).

If a dividend cut doesn’t come to pass, it can be an attractive investment to hold for tax-free dividend income in a TFSA.

TC Energy

TC Energy (TSX:TRP) is a Calgary-based $67.70 billion market-cap energy infrastructure company that helps energy companies producing natural gas transport energy products after production. It owns and operates an extensive network of natural gas pipelines and earns money by transporting gas and charging toll fees for it.

Since it charges based on volume, the company’s cash flows do not rely on the value of the commodities it transports. The business model protects its revenue from fluctuations in commodity prices. It can comfortably fund its debt servicing, capital expenses, and dividends. TRP stock has increased payouts to its investors for the last 24 consecutive years.

As of this writing, TRP stock trades for $65.14 per share and pays investors their distributions at a juicy 5.22% annualized dividend yield.

Foolish takeaway

The $7,000 contribution room added this year is an excellent opportunity for you to make better use of your TFSA to generate substantial tax-free returns. However, it’s important to remember not to put all your money in one or two assets. Stock market investing is inherently risk, and even the most reliable TSX stocks can disappoint if the conditions are bad enough.

For the sake of explaining the concept, the table below will show how an equal split of the $7,000 contribution room across the above two dividend stocks will pay out in a TFSA per year in dividends.