Canadian retirees are searching for ways to earn attractive income without taking on too much risk on funds held inside a self-directed Tax-Free Savings Account.
One popular TFSA strategy for generating passive income involves owning a combination of dividend stocks and guaranteed investment certificates.
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Dividend stocks
Companies with long track records of delivering steady dividend growth deserve to be in any buy-and-hold income portfolio. Each new dividend increase raises the yield on the initial investment. This can really add up over time. In addition, stocks that consistently hike the dividend tend to drift higher over the long run.
Enbridge (TSX: ENB) is a good example of a top Canadian dividend-growth stock. The board has increased the distribution in each of the past 31 years.
Enbridge combines organic development projects with strategic acquisitions to drive long-term growth.
On the acquisition side, most of the expansion has occurred in the United States in recent years. Enbridge bought the largest oil export terminal in Texas for US$3 billion in 2021 to take advantage of an anticipated increase in global demand for North American oil. It then became the largest North American operator of natural gas utilities after the US$14 billion purchase in 2024 of three American natural gas utilities. Enbridge also bulked up its wind and solar group.
The current $40 capital program includes investments across all of the core divisions. As the new assets are completed and go into service, Enbridge expects distributable cash flow to increase by about 5% annually over the medium term. This should support ongoing dividend growth. At the time of writing, ENB stock provides a 5% dividend yield.
Owning stocks can boost returns, but there are risks. Share prices can fall below the purchase price, and dividends can be cut if a company gets into financial difficulties. Top dividend-growth names, however, usually rebound from pullbacks.
GICs
Owning guaranteed investment certificates can reduce overall risk in a TFSA portfolio while still generating decent income. Rates on GICs increased in recent months due to higher yields in government bond markets. At the time of writing, investors can get non-cashable GICs offering 3.5% to 4%, depending on the term and the provider. This is above the current rate of inflation in Canada.
GICs are risk-free as long as the amount is within the $100,000 threshold and offered by a Canada Deposit Insurance Corporation (CDIC) member.
To get the best rates, investors need to lock up the funds for the term of the certificate. This is important to consider, as the money won’t be accessible until the GIC matures.
The bottom line
Investors who are more risk-averse and comfortable with a slightly lower return will likely focus on GICs. Those who can handle some market volatility and are seeking higher yields might decide to go overweight on dividend stocks.
In the current market conditions, it is easy for investors to put together a diversified portfolio of GICs and dividend stocks to get an average yield of at least 4%. On a TFSA of $20,000, this would generate $800 per year in tax-free passive income.
