Retirees and other dividend investors are searching for ways to get better returns on savings held inside a self-directed Tax-Free Savings Account (TFSA). One popular investing strategy involves buying good dividend-growth stocks that can provide income and boost long-term gains.
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TFSA Income
The TFSA limit in 2025 is $7,000. All interest, dividends, and capital gains generated inside a TFSA on qualifying investments are tax-free. This means the full value of the earnings can go right into your pocket without having to share some with the CRA. The gains can also be fully reinvested, if passive income isn’t the core goal.
Retirees who receive Old Age Security (OAS) get another benefit. The CRA does not count TFSA income when calculating net world income used to determine the Old Age Security (OAS) pension recovery tax. This is important for seniors with high incomes. Every dollar of net world income earned above a minimum threshold triggers a $0.15 pension recovery tax. The number to watch in the 2025 tax year is $93,454.
As such, retirees should consider fully using TFSA contribution space before holding income-generating investments inside taxable accounts.
Power of compounding
Younger investors can use dividend stocks to build retirement savings inside a TFSA. One strategy involves owning dividend-growth stocks and reinvesting the distributions in new shares. This sets off a powerful compounding process that can turn modest initial investments into meaningful savings over time, especially when dividends increase and the share price drifts higher.
Fortis
Fortis (TSX:FTS) is a good example of a stock with a great track record of dividend growth. The company has raised the payout in each of the past 51 years.
Fortis operates utility businesses in Canada, the United States, and the Caribbean. The company has $75 billion in assets, including natural gas utilities, power generation facilities, and electric transmission networks. Nearly all of the revenue comes from rate-regulated businesses. This means cash flow is normally predictable and reliable.
Fortis is working on a $26 billion capital program that will raise the rate base from $39 billion in 2024 to $53 billion in 2029. Revenue and earnings growth from the new assets should support planned annual dividend increases of 4% to 6% over the next five years. New projects are under consideration that could get added to the backlog. This would potentially extend the dividend-growth guidance or boost the size of the increases.
Fortis has a dividend reinvestment plan that gives investors a 2% discount on stock purchased using dividend distributions.
On the risk side, Fortis is sensitive to changes in interest rates due to the large amount of debt it uses to fund part of the capital program. The stock fell when the central banks in Canada and the United States raised rates in 2022. Rate cuts last year spurred the rebound. Analysts broadly expect interest rates to continue to decline later this year, as long as there isn’t a spike in inflation caused by tariffs.
Buying Fortis on pullbacks has historically proven to be a savvy move for patient investors.
The bottom line
The TSX is home to many good dividend-growth stocks that investors can own to generate income and long-term total returns inside a self-directed TFSA. Fortis still deserves to be on your radar, even after the nice rally in the past year.
