Investors who are looking to create sustainable and meaningful passive-income streams do have a number of fantastic options to choose from. For Canadian investors who are able to take advantage of the Tax Free Savings Account (a long-term retirement savings tool that allows for tax-free withdrawals in retirement, much like a Roth IRA), putting most of one’s capital to work in such an account in higher-growth equities makes the most sense.
To a certain degree, I’d argue that it’s probably best for most long-term investors looking to create passive income in retirement to do so outside of a TFSA. Indeed, the long-term tax advantages that investors get from being able to pull out capital gains tax-free should far outweigh the tax advantages from receiving dividends in retirement (which is further offset by the dividend tax credit in Canada).
With that said, here are the top two ways I’d structure my TFSA for a consistent monthly income in retirement. This is my own personal strategy, which would apply with someone putting $14,000 to work (or any amount really) in their TFSA or similar fund.
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Focus on high dividend-growth stocks
A given company’s dividend yield today may not matter as much to an investor with, say, two or three decades until retirement. Rather, how quickly a given company within one’s TFSA hikes its dividend (and how consistently) can matter more.
Among top Canadian dividend-growth stocks, my preference for long-term investors seeking that unique mix of capital appreciation and dividend income (total return) is Fortis (TSX: FTS).
With a more than five-decade-long track record of hiking its dividend, Fortis has continued to grow its distribution for long-term investors looking for that inflation-beating passive-income stream in retirement. And looking at the chart above, it’s also clear that this is a stock that’s provided very nice gains for patient investors in recent years.
That’s the kind of optimal mix to be held within one’s TFSA, and why Fortis remains a top pick of mine in this regard.
Put some capital to work in bonds
Canadian bond yields have come down considerably, thanks in part to a rate-cutting campaign from the Bank of Canada, which has the overnight rate at just 2.25% in this key market.
However, global bond markets can offer much higher yields. My preference right now for those thinking truly long-term is to consider locking up some capital in long-term bond funds or buying bonds outright. I have a pretty heavy weighting of 10-year and 20-year U.S. Treasurys, I think, that provide the right growth and risk profile over the long term.
For those concerned about a potential global recession brewing, such a move may indeed be best for generating positive risk-adjusted returns over such a time frame as well.
