One of the biggest problems that I have with the Tax-Free Savings Account (TFSA) is with its name. I understand that it is technically a savings account. However, for savvier Canadians who know how to use it well, it would be better to consider it an investment account.
When you contribute to a TFSA, you use after-tax dollars. Since you’re already investing with money you have paid taxes on, the returns on the investments will not be taxed. For stock market investors, this means that the returns from dividends, capital gains, and interest from each dollar contributed to their TFSA are going to be tax-free.
After the 2026 update, the cumulative contribution room in a TFSA since its inception has gone all the way up to $109,000. That is plenty of room to make the kind of investments that can help you fulfill your goals of financial freedom.
There is no one-size-fits-all approach to making the most of a TFSA. For most investors, creating a self-directed portfolio of income-generating assets like dividend stocks can provide the growth needed to generate meaningful tax-free income.
Today, I will discuss two of my favourite picks among Canadian dividend stocks that can be excellent foundations for such a portfolio.
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Fortis
Fortis (TSX:FTS) is the darling investment for income-seeking investors. The $39.95 billion market cap company is a giant in the utility sector. It owns and operates several natural gas and electricity utility businesses across Canada, the U.S., and the Caribbean.
Most of the company’s revenue comes through long-term contracted assets in rate-regulated markets. These things mean that Fortis has predictable revenue that is virtually guaranteed due to the essential nature of its services.
It might be the ultimate boring defensive stock because it doesn’t offer much in capital gains. However, Fortis more than makes up for it with its stability and an over 50-year streak of increasing dividends to its shareholders. As of this writing, it trades for $78.46 per share and pays $0.64 per share each quarter, translating to a 3.26% annualized dividend yield.
Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) is another long-term investment for many Canadians due to similar reasons. The $134.92 billion market-cap company is a giant in the Canadian energy industry. It is the largest and most efficient energy producer in the country, generating substantial free cash flow. When commodity prices are higher, margins are better for the company. In turn, its capital gains see its investors get greater returns on their investments.
CNRL has a portfolio comprising long-life and low-decline assets. These qualities give the company a production profile that can last decades and generate strong cash flows even when crude prices are weaker. The stability lets CNRL pay out a reliable dividend to its investors, and for the last 10 years, the stock has increased its payouts to shareholders.
As of this writing, Canadian Natural Resources stock trades for $64.68 per share and pays investors $0.625 per share each quarter, translating to a 3.87% dividend yield.
Foolish takeaway
Fortis stock and Canadian Natural Resources stock add defensive income for your self-directed portfolio, alongside long-term growth. Blue-chip stocks like these can anchor your portfolio and protect it from significant downturns.
After building up a solid collection of defensive assets, you can start dipping your toes in high-growth stocks to accelerate your wealth growth. Since growth stocks are higher-risk investments, a well-balanced portfolio with defensive stocks can help you mitigate the overall risk.
