Canadians are using their Tax-Free Savings Account (TFSA) to build portfolios of investments that can provide income and complement government and company pensions in retirement. With stock markets at record highs and economic uncertainty on the horizon, investors are wondering where to invest their TFSA savings.
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Dividend Stocks
Owning dividend stocks comes with risk. The share price can fall below the price paid for the stock and companies sometimes cut their dividends to preserve cash during difficult financial times. The upside, however, is that many stocks raise their dividends at a steady pace. Each time the dividend increases, the yield on the initial investment also rises.
Stocks that raise dividends regularly also tend to move higher over the long term. This provides capital gains that can be tapped at some point. Stocks provide good liquidity, as they can be sold to access the funds in the case of an emergency or for making a large purchase.
In the current environment, it makes sense to look for stocks that have steady revenue streams in all economic conditions and can support ongoing dividend growth.
Enbridge
Enbridge (TSX:ENB) is a giant in the energy infrastructure sector with a current market capitalization of $134 billion. The company has the financial clout to make large acquisitions and can access capital for its organic development program.
Enbridge spent US$14 billion in 2024 to buy three American natural gas utilities. The deals made Enbridge the largest natural gas utility operator in North America. Enbridge is also working on a $28 billion capital program that will drive steady earnings and cash flow growth over the next few years. This should lead to ongoing annual dividend increases. Enbridge raised the dividend in each of the past 30 years. Investors who buy ENB stock at the current price can get a dividend yield of 6.1%.
Enbridge is off its recent highs, so investors have a chance to buy the stock on a small dip.
Fortis
Fortis (TSX:FTS) is another good dividend-growth stock to consider. The board has increased the distribution for 51 consecutive years and plans to raise the dividend by 4% to 6% annually through 2029. Revenue and profit growth will come from the current $26 billion capital program.
Fortis gets most of its revenue from rate-regulated utilities. These include natural gas distribution utilities, power generation facilities, and electricity transmission networks. Investors who buy FTS stock at the current price can get a dividend yield of 3.8%.
GICs
Guaranteed Investment Certificates (GICs) provide capital protection while still delivering decent returns. GIC rates are not as high as they were in the fall of 2023 when they soared as high as 6%, but investors can still get non-cashable GICs offering more than 3.5%, depending on the issuer and the term. This is above inflation, so it is worth considering for a TFSA portfolio focused on generating income.
The bottom line
The right mix of dividend stocks and GICs for a $25,000 portfolio is different for each investor depending on a person’s risk tolerance, need for access to the capital, and the desired returns.
In the current market conditions, it is possible to build a diversified portfolio of GICs and good dividend stocks to get an average yield of 4.5%. This strategy reduces risk and generates decent income, while still providing opportunity for capital growth.
