Canadian investors are using their self-directed Tax-Free Savings Account (TFSA) to build portfolios that can generate retirement income to complement CPP, OAS, and work pensions.
In the current market conditions, it makes sense to consider quality dividend stocks, as well as fixed income investments.
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GICs or Dividend Stocks
Rates offered on Guaranteed Investment Certificates (GICs) have increased considerably in recent weeks. This is due to a jump in government bond yields caused by the selloff oin treasuries, as market sentiment has shifted from initial expectations of rate cuts at the start of the year to anticipation of rate hikes by the Bank of Canada before the end of 2026 or in 2027, as soaring oil prices threaten to drive up inflation. Rate hikes are painful for borrowers, but they are good news for income investors.
Non-cashable GICs offered by Canada Deposit Insurance Corporation (CDIC) members are now available in the 3.5% to 4% range, depending on the term and the provider. Inflation in Canada is currently at 2.8%, so the GIC returns are attractive.
The main benefit of the GIC is the safety of the invested capital, as long as the GIC is within the $100,000 limit and purchased through a CDIC member. This is important for people who don’t want to take on any risk with their savings. To get the best rates, investors need to buy non-cashable GICs. The downside is that the funds are locked up for the term of the GIC. The rate is also fixed. Market rates available when the GIC matures might be lower, so there could be drop in income on the savings when reinvested.
Dividend stocks often provide higher yields than the rates offered on GICs and each dividend hike raises the yield on the initial investment. Stocks can also be sold at any time to access the funds in case there is an emergency requirement to tap savings. Stocks, however, come with risk. Share prices can fall below the purchase price and dividends can be cut if a company runs into cash flow challenges.
With stock markets near all-time highs and economic headwinds potentially on the horizon, it makes sense to consider companies that have long track records of delivering steady dividend growth through the full economic cycle.
Enbridge (TSX: ENB), for example, has increased its dividend in each of the past 31 years. The stock is up 25% in the past year, but still provides a dividend yield of 4.9%.
Enbridge is working on a $40 billion capital program that is expected to drive earnings and distributable cash flow higher by 5% per year over the medium term. This should support ongoing dividend growth.
Enbridge also has the financial clout to make large strategic acquisitions.
The bottom line
The right mix of fixed income and dividend stocks is different for each investor depending on a person’s risk appetite, required returns, and need for access to the invested funds.
In the current market conditions it is possible to build a diversified portfolio of GICs and top dividend stocks to get an average yield above 4%. This gives investors better returns than simply owning GICs while reducing the risk of an all-stock portfolio.
