Positioning your TFSA portfolio for growth might be the optimal strategy, especially if you’re younger with a long time horizon (at least three years, but longer is always better!), and know your way around tech stocks and some of the more volatile, but exciting corners of the growthier part of the stock market. The TFSA isn’t just an investment to crank up the dial to maximum growth, though. It’s also a great way to get tax-free dividends. Of course, by holding Canadian dividend stocks in your non-registered account, you’ll be able to make the most of that dividend tax credit.
But if you’re keen on tax-free income and not only a credit, perhaps transforming your TFSA into a cash cow can be a good idea, especially if you’re looking to set it up as a passive income source in retirement. Indeed, the TFSA can be a very valuable tool come time to retire. And the more you contribute, the larger the income generation will be.
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It’s not hard to turn your TFSA into a tax-free cash cow
While you could stash any dividend stock in your TFSA – including high-yielders like Telus (TSX: T), which sports a 9% yield at the time of this writing – REIT, or income ETF, I do find that part of the fun is combining different income-creating securities into a portfolio that’s tailored to you.
At the end of the day, higher-yielders (think equities that are down more than 50% from their all-time highs) can be riskier, and their payouts might not be sticking around for the long haul, especially if we’re talking about a stock that’s struggled to bottom out (think Telus shares) in recent years. Balancing that choppier high-yielder with something like a steady REIT could make a lot of sense, especially in a TFSA. As you may know, REITs are a great fit for the TFSA.
They’re not eligible for the Canadian dividend tax credit in a non-registered account, anyway! Because, technically, they pay distributions, not dividends like your favourite stocks do. Either way, REITs have a lot to offer on the yield front. And it’s these rich yields that I believe are worth shielding from taxation with your TFSA.
Mixing in some steady income ETFs can help!
There are many terrific REITs, and they’re all worth exploring. Personally, I think keeping things simple with the Vanguard FTSE Canadian Capped REIT Index ETF (TSX: VRE) could be a smart way to go if no individual REITs immediately come to mind.
The VRE pays a 3.03% distribution and invests in a broad range of Canadian REITs, many of which could benefit if interest rates continue moving lower. The 0.39% MER might be on the high end, but that’s about as low as it goes regarding similar REIT ETFs, especially since Vanguard tends to offer some of the lowest fees out there.
Finally, a core ETF such as the Vanguard FTSE Canadian Dividend Yield Index ETF (TSX: VDY) also stands out as a great bet. The low-cost ETF provides heavy exposure to the large-cap dividend payers, many of which are also featured in the TSX Index. The 0.22% MER is competitive and the 3.8% yield is enticing. Add the recent 32% past-year surge into the equation, and this name may very well be the foundation to any TFSA income portfolio.
