Canadian investors are wondering which self-directed Tax-Free Savings Account (TFSA) investments can provide decent yield and a shot at some long-term upside.
In the current market conditions, where the TSX sits near its record high and economic headwinds could be on the way, it makes sense to be a bit defensive. This means considering both Guaranteed Investment Certificates (GICs) and quality dividend-growth stocks.
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TFSA benefits
The TFSA limit for 2026 will be $7,000. This brings the cumulative maximum TFSA contribution space to $109,000 for anyone who has qualified each year since the creation of the TFSA in 2009.
All interest, dividends, and capital gains earned inside a TFSA are tax-free. That means the full amount of the earnings can be reinvested or removed as tax-free income without worrying that some has to be shared with the CRA.
This is helpful for all investors, but those in higher marginal tax brackets and retirees who collect Old Age Security (OAS) really benefit. Earnings taken out of a TFSA don’t bump up taxable earnings and won’t put OAS payments at risk of a clawback.
Any funds taken out of a TFSA will open an equivalent amount of new contribution space in the following calendar year, in addition to the regular TFSA limit amount.
GICs or dividend stocks
GIC rates briefly hit 6% two years ago. They have since trended lower due to cuts to interest rates by the Bank of Canada and the resulting lower yields on government bonds. That being said, investors can still get non-cashable GIC rates in the 3% to 3.7% range from Canada Deposit Insurance Corp (CDIC) members, depending on the term and the provider. This is comfortably above Canada’s current inflation rate of 2.2%, so it makes sense to consider some risk-free GICs for a TFSA income portfolio.
The downside of non-cashable GICs is that the money is locked in for the term and the rate is fixed. This is important to consider if investors need to maintain access to their TFSA cash or are looking to get a steady increase in yield.
Dividend stocks can provide better returns than GICs, but they also come with risk. Share prices can fall below the purchase price, and dividends might get cut if a company runs into cash flow problems. This is why it makes sense to look for stocks that have good track records of dividend growth supported by higher earnings.
Enbridge (TSX:ENB) is a good example of a top Canadian dividend-growth stock. The board raised the distribution in each of the past 30 years. Ongoing dividend increases should be on the way, supported by new revenue and earnings from acquisitions and the $35 billion capital program. Investors who buy ENB stock at the current price can get a dividend yield of 5.6%.
The appeal of owning a dividend-growth stock is the opportunity to get a rising yield on the initial investment as dividends increase. Investors also have a shot at capital gains if the stock price moves higher. On the liquidity side, shares can be sold at any time to access the money if needed for an emergency.
The bottom line
The right mix between GICs and dividend stocks depends on a person’s required return, need for access to the funds, and risk tolerance. In the current market, investors can quite easily put together a diversified portfolio of GICs and dividend-growth stocks to get an average yield of at least 4%.
