Canadian savers are searching for good investments for a self-directed Tax-Free Savings Account (TFSA) focused on income and capital gains.
In the current market environment, it makes sense to look for ways to reduce risk while getting a decent yield on the invested funds.
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TFSA limit
The TFSA limit is $7,000 in 2025, bringing the cumulative maximum contribution space to $102,000 for anyone who has qualified since the creation of the TFSA in 2009. This is large enough for retirees and younger investors to build meaningful savings portfolios that can generate retirement income to complement CPP, OAS, and work pensions.
Interest, dividends, and capital gains earned inside the TFSA on eligible investments are tax-free. This means the full amount of the income can be removed or reinvested without worrying about sharing some with the CRA. Pensioners who collect Old Age Security are also able to take profits from the TFSA without the amount being included in the net world income calculation used to determine the OAS Clawback. Every dollar of net world income above a minimum threshold is hit with a 15-cent OAS pension recovery tax. The number to watch in the 2025 income year is $93,454.
Best investments for a TFSA
Income investors tend to buy dividend stocks and guaranteed investment certificates (GICs) for their TFSA portfolios. The right mix depends on a person’s risk tolerance, required yield, and need for access to the invested funds.
Dividend stocks can offer better yields than GICs, and dividend growth increases the yield on the initial investment. Stocks can also be sold at any time to tap the funds in the event there is a need for extra cash. On the downside, stocks come with capital risk. Share prices can fall below the purchase price and dividends can get cut. That being said, good dividend-growth stocks normally recover from pullbacks.
Enbridge (TSX: ENB) is one example of a steady dividend-growth stock with an attractive yield. The company has increased the dividend for 30 consecutive years and offers a dividend yield of 5.8% at the current share price of nearly $64.
Enbridge is working on a $26 billion capital program that should boost revenue and cash flow to support ongoing dividend growth over the next few years.
GICs
GIC rates on non-cashable certificates have dropped from around 6% in the fall of 2023 to the current range of 3% to 4%, depending on the term and the provider. Lower interest rates and declining bond yields are to blame for the drop. The Bank of Canada is currently in a wait-and-see mode regarding additional rate cuts. A recession caused by an extended trade battle with the United States would likely force the central bank to cut rates further in the coming months.
Investors who are comfortable with returns in the 3% to 4% range should consider adding some GICs to a TFSA income portfolio to reduce overall capital risk.
The bottom line on TFSA income
It is quite easy right now to build a diversified TFSA portfolio of GICs and dividend-growth stocks to get an average yield of 4% to 5%. That’s comfortably above the current rate of inflation, and the strategy provides some protection against market volatility.
