Canadians are using their Tax-Free Savings Accounts (TFSA) to build portfolios of investments that can complement work and government pensions in retirement.
Market volatility caused by tariff uncertainty is expected to continue for some time. A full-blown trade war could push the U.S. and Canadian economies into a recession. With these threats in mind, it makes sense to consider a more defensive strategy for a self-directed TFSA that is focused on dividend income and longer-term total returns.
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Dividend stocks
Owning stocks comes with risks, as share prices can fall below the purchase price, and dividends sometimes get cut.
The pullback in some sectors, however, is actually giving investors a chance to buy some top Canadian dividend stocks at a discount. Yields are higher as a result, and there is decent upside potential on a rebound. Other sectors are proving to be very resilient in the current market conditions.
Bank of Montreal (TSX: BMO), for example, trades near $132 per share at the time of writing compared to $149 in February. The bank has a large U.S. presence that has grown through a series of acquisitions over the past 40 years. This gives investors good exposure to long-term U.S. economic growth through a solid Canadian bank.
Bank of Montreal has paid a dividend every year for nearly two centuries. Investors who buy BMO stock at the current level can get a dividend yield of 4.8%.
Enbridge (TSX: ENB) raised its dividend in each of the past 30 years. The energy infrastructure firm is strategically important for the smooth operation of the Canadian and U.S. economies. Enbridge’s oil and natural gas transmission networks move roughly 30% of the oil produced in the two countries and about 20% of the natural gas used in the United States.
In recent years, Enbridge has diversified its asset portfolio. The company bought an oil export terminal in Texas and has a stake in the Woodfibre liquified natural gas (LNG) export facility being built in British Columbia. Last year, Enbridge spent US$14 billion to buy three natural gas utilities.
Enbridge is working on a $26 billion capital program that will help boost distributable cash flow by 3% over the medium term. This should support steady dividend growth. Investors who buy ENB stock at the current price can get a dividend yield of 5.9%. The shares are up 31% in the past year.
GICs
Guaranteed Investment Certificates (GICs) offer a good way to get safe returns on savings. The rates available on GICs have come down from the 2023 highs when investors could briefly get 6% from some providers. In the current market, it is still possible to get non-cashable GICs in the 3% to 4% range, depending on the term and the financial institution. That’s still above the rate of inflation, and the investment won’t keep you up at night.
The bottom line on top investments for TFSA income and growth
Risk tolerance and required returns are different for everyone, so the right mix of dividend stocks and GICs is a personal choice. That being said, most people would likely benefit by building a diversified portfolio of quality dividend stocks and GICs. The strategy helps boost average yield while reducing risk and provides a shot at some decent capital gains if the stocks move higher, which is typically the case over the long run with quality dividend-growth names.
