Canadian retirees and other self-directed Tax-Free Savings Account (TFSA) investors are searching for ways to generate steady tax-free income to help cover rising living costs, or build retirement portfolios. One popular TFSA investing strategy to achieve these goals involves owning TSX dividend stocks.
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TFSA limit 2026
The TFSA limit in 2026 is $7,000. This brings the cumulative maximum TFSA contribution room per person to $109,000 for anyone who has qualified for the TFSA since 2009 when the government launched the new savings tool.
TFSA contribution room that is not used in a calendar year is carried forward. This provides flexibility for savers with variable income streams.
Dividends, interest, and capital gains generated inside the TFSA can be removed as tax-free income, or fully reinvested. The CRA does not take a cut of any of the TFSA earnings. In addition, the income earned in a TFSA does not count towards the net world income calculation the CRA uses to determine the Old Age Security (OAS) pension recovery tax. This is particularly important for seniors who collect OAS and have high total incomes coming from CPP, OAS, company pensions, and other taxable earnings. Every dollar of net world income earned above a minimum threshold is subject to a $0.15 OAS pension recovery tax that reduces the total OAS that will be paid out in the next OAS payment year.
As such, it makes sense for most people to maximize their TFSA contributions before holding income-generating investments in taxable investing accounts.
Good dividend stocks for a TFSA
Owning stocks comes with risks. Share prices can fall below the purchase price and sometimes they don’t recover, or they can take a long time to rebound. This is important to consider for people who might need access to their invested capital over the short term. Dividends can also get cut or eliminated when a company runs into financial difficulties.
That being said, there are many top TSX dividend payers that have long track records of delivering steady dividends, supported by rising earnings. When choosing a dividend stock for an income portfolio, the highest yield isn’t necessarily the only factor to consider. Distribution growth is also important. Every increase to the dividend raises the yield on the initial investment.
Fortis (TSX:FTS), for example, currently provides a dividend yield that is 3.3%. That’s lower than many other dividend stocks, but the board has increased the dividend annually for the past 52 years and intends to boost the distribution by 4% to 6% per year through at least 2030.
Fortis gets nearly all of its revenue from rate-regulated businesses, including power generation facilities, electricity transmission networks, and natural gas distribution utilities. The company’s $28.8 billion capital program should lead to higher revenue and cash flow in the coming years to support the planned dividend growth.
Steady dividend growth tends to lead to a higher share price over time, boosting the total return. A $10,000 investment in Fortis 30 years ago would be worth about $350,000 today with the dividends reinvested.
The bottom line
Pipeline companies and the big Canadian banks are other dividend payers to consider for a TFSA income portfolio. Volatility should be expected in the coming months, but investors who plan to own these stocks for the long run can take advantage of pullbacks to add to the positions to boost the average yield on their investments.
