Canadian seniors want to generate steady and high-yield passive income inside their self-directed Tax-Free Savings Account (TFSA) without taking on too much capital risk. With interest rates in decline and stock markets at record highs, the investment decisions seniors make on new TFSA contributions are a bit more challenging right now compared to two years ago.
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Guaranteed Investment Certificates
Guaranteed Investment Certificates (GICs) are popular among investors who don’t want to take on any risk and are comfortable receiving a yield that is lower than that offered by some dividend stocks.
In late 2023, GIC rates briefly soared as high as 6%. Since then, GIC rates have come down due to rate cuts by the Bank of Canada and a decline in yields on Canadian government bonds. That being said, bond yields have trended higher in recent months, leading to a bounce in GIC rates. At the time of writing, non-cashable GICs from Canada Deposit Insurance Corporation (CDIC) members are available in the 3.5% to 3.9% range, depending on the term and the issuer. Inflation in Canada in June was 1.9%, so a 3.9% yield on a risk-free investment is attractive.
The downside of GICs is that you have to lock in the funds to get the best rates. This is fine if you are sure you won’t need access to the invested capital. Rates offered in the market when the GIC matures might be much lower, so there could be a risk of taking an income hit at the time of renewal.
Dividend stocks
Owning stocks comes with capital risk. Share prices can fall below the purchase price and might take a long time to recover. In some cases, they never regain the previous level. Dividends can be cut or eliminated if a company runs into financial difficulties.
Stocks, however, can be sold at any time to access the capital. This is useful for investors who worry they might need to access a big chunk of their funds at some point for a purchase or to cover an emergency expense.
The potential reward for taking the risk of owning stocks is that dividends and share prices can increase over time, providing growing income and capital appreciation. In the case where investors are seeking passive income, it makes sense to look for stocks that have long track records of dividend growth supported by rising revenue and increasing profits.
Enbridge (TSX: ENB), for example, has increased its dividend in each of the past 30 years.
The company grows through acquisitions and development projects. New assets boost revenue and cash flow to support dividend hikes. Enbridge completed a US$14 billion acquisition of three natural gas utilities in the United States in 2024. The company also has a $32 billion project backlog on the go to drive additional growth.
Investors who buy ENB stock at the current share price can get a dividend yield of 5.9%.
The bottom line
The right mix of GICs and dividend stocks is different for each investor depending on a person’s risk tolerance, required return, and liquidity needs.
In the current market environment, an investor can easily put together a diversified TFSA portfolio of GICs and top dividend-growth stocks to earn an average yield of 4% to 5%. This is a decent return with inflation near 2%. The GIC component reduces portfolio risk while the dividend stocks can boost yield and provide potential capital upside.
