Canadian investors can turn their Tax-Free Savings Account (TFSA) into a cash-generating machine with just $30,000 by holding quality dividend-paying stocks. In addition to a consistent stream of dividend income, fundamentally strong companies also offer you an opportunity to boost total returns via capital gains.
Moreover, any returns earned in the TFSA from qualified investments are exempt from Canada Revenue Agency taxes. Here are two top TSX dividend stocks TFSA holders can own in December 2025.
Is this Canadian dividend stock a good buy?
Valued at $4.4 billion by market cap, Exchange Income (TSX:EIF) has returned 430% to shareholders in dividend-adjusted gains over the past 10 years. Exchange Income, which operates in the aerospace manufacturing segment, continues to grow at a steady pace, translating into consistent dividend hikes.
Its annual dividend per share rose from $2 in 2016 to $2.64 in 2024, and analysts forecast the payout to reach $2.82 in 2027. The company is also expected to increase its annual free cash flow from $199 million in 2024 to $341 million in 2027. Consequently, the company’s dividend payout ratio is expected to improve from 72% in 2024 to 45% in 2027.
A sustainable payout ratio allows Exchange Income to use excess cash to fund accretive acquisitions, raise the dividend further, and lower balance sheet debt.
If EIF stock is priced at 15 times forward FCF, which is quite reasonable, it could gain 20% from current levels. If we adjust for dividends, cumulative returns could be closer to 24% over the next 12 months. Bay Street remains bullish on the TSX dividend stock and expects it to gain 11% from current levels.
Is this TSX stock undervalued?
While Exchange Income offers you a yield of just 3.4%, Alvopetro Energy’s (TSXV:ALV) yield is much higher at 9%. Moreover, the energy stock is forecast to expand its free cash flow from $14 million in 2024 to $73 million in 2029.
If the small-cap energy stock is priced at 5 times forward earnings, it could gain 63% over the next 3 years. If we adjust for dividends, cumulative returns should be closer to 95%. Alvopetro maintained its quarterly dividend at US$0.10 per share and has returned over $60 million to shareholders since initiating the program in 2021.
Alvopetro Energy posted a record production month in October while navigating a capital-intensive period that temporarily squeezed its cash position. The oil and gas producer averaged 2,923 barrels of oil equivalent per day in Q3, as output from Brazil and the newly acquired Canadian operations came online.
Alvopetro’s Brazil business generated operating netbacks of US$55.90 per barrel, with margins at 85%, benefiting from attractive natural gas pricing and a favourable tax regime that keeps the effective rate around 15%. The company realized US$11.04 per thousand cubic feet for gas during the quarter, up 4% from the prior period.
Capital spending spiked during the quarter as the company ran concurrent drilling programs in Brazil and Western Canada, thereby reducing cash and working capital.
Management acknowledged the capital-intensive phase but noted that spending slowed considerably in Brazil, where the focus has shifted to optimizing existing production and planning the next development phase.
The Canadian entry is progressing with four wells drilled in the Mannville Stack Heavy Oil play in Saskatchewan. Two additional wells are planned for the late fourth quarter, with economics showing internal rates of return near 100% at US$70 oil prices.
