Canadian pensioners are searching for ways to generate better returns on their Tax-Free Savings Account (TFSA) investments without taking on too much capital risk. As of 2026, the maximum cumulative TFSA contribution space per person is $109,000.
One popular strategy involves building a portfolio of Guaranteed Investment Certificates (GIC) while also holding quality Canadian dividend stocks that consistently raise their distributions.
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GIC outlook
GIC rates jumped as high as 6% at one point in 2023 when the Bank of Canada aggressively raised interest rates to get inflation under control. This was fantastic for pensioners who prefer to take the safest route to generate passive income on their savings.
Rate cuts in 2024 and 2025, however, led to reduced yields in the bond market, which, in turn, forced banks and other financial companies to lower the rates offered on their GICs. Depending on the term and the provider, non-cashable GIC rates fell back to the 3% to 3.5% range.
In recent months, the movements have been more volatile. Rising inflation caused by the jump in oil prices triggered a spike in bond yields as markets started to anticipate new rate hikes from the Bank of Canada. Non-cashable GIC rates briefly ranged from 3.5% to 4%, but have since dipped again as oil prices and bond yields declined.
Looking ahead, sticky inflation could still force the Bank of Canada to increase interest rates later this year or in 2027. If that turns out to be the case, bond yields should drift higher again and GIC rates could retest the 4% mark.
Canadian government bond yields tend to track movements in yields on U.S. treasuries. Investors who are planning to put TFSA money in GICs should keep an eye government bond yields to get a sense of which way GIC rates are likely headed.
Dividend stock outlook
The stock market has been on an upward trend for nearly three years. Many dividend payers are trading near their record highs, and valuations in some sectors are arguably stretched. Investors need to keep this in mind when considering where to put new money to work. A market correction is will occur at some point.
That being said, buy-and-hold income investors can still find attractive picks and should view pullbacks as opportunities to add to the positions. It makes sense in this environment to consider stocks with long track records of dividend growth.
Enbridge (TSX:ENB), for example, has increased its dividend for 31 consecutive years.
The stock is up more than 25% in the past 12 months, but investors can still pick up a dividend yield near 5%. Enbridge expects distributable cash flow increase by 5% per year over the medium term, supported by a $40 billing secured capital program. This should enable the board to maintain steady dividend increases.
The bottom line
The best mix of GICs and stocks is different for each person, depending on risk tolerance, required returns, and the need for quick access to the invested funds.
At the time of writing, it is quite easy for investors to put together a diversified portfolio of GICs and dividend stocks to get an average yield of at least 4%, which is still comfortably above inflation. On a TFSA of $109,000 this would generate $4,360 per year in tax-free passive income.
