TFSA: 3 Dividend Stocks to Lock in for Long-Term Passive Income

Looking for dividend stocks that can also deliver some big gains? These three stocks are ideal for a long-term TFSA.

Robin Brown

Robin Brown has been a Motley Fool contributor since January 2020. He has lived in Canada, Norway, and Australia where he studied theology and business management. Robin works as a commercial real estate manager, as well as an investment research advisor for a private investment manager. Today, he provides equity research and analysis for a private family office. He enjoys traveling, hiking, fishing, and spending time with his wife and children.

Published July 23, 4:10 pm EDT

When I invest in my TFSA (Tax-Free Savings Account), I want to hold stocks that will provide the best combination of dividend income and capital returns. The TFSA protects you from paying tax on all gains and dividend income.

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Maximize your income with your TFSA

So, you want to try and maximize those gains and income for as long as possible. The power of tax-free compounding is where the TFSA really makes investors wealthy.

When I am looking for dividend stocks, I want income, but I also want capital upside. The dividend yield matters. However, it is a part of the investment thesis, not the whole thesis.

The dividend yield and growth should be an outcome of the business performing well. If I want to maximize my total TFSA gains, I want the dividend to contribute and not detract from that total return profile.

A long-term dividend growth legend

Dollarama (TSX:DOL) is an excellent example of this. It only yields 0.24% today. However, over the past 14 years, it has increased its dividend by a 20% compounded annual rate. Its dividend is up 1,315% in that time. If you had bought this stock in 2012 at $7 per share, you would be sitting on a 6.4% dividend yield on cost.

Dollarama has built an essential goods empire across Canada. You can buy just about any daily good under $5 at its stores. Consumers go in looking to buy one thing and often come out with a full basket.

The company has compounded earnings per share by a 19% compounded annual rate in the past 14 years. Likewise, it has bought back close to 40% of its shares outstanding. This stock has earned a 2,460% capital return for shareholders.

The point here is that despite a small yield, shareholders have enjoyed incredible returns with Dollarama. This is exactly the type of stock investors want to own inside a TFSA.

TFI International

TFI International (TSX:TFII) has been on a similar trajectory to Dollarama. It only yields 1.2% today. However, it has delivered 14% compounded annual dividend growth in the past 10 years. TFII’s dividend has increased 258%, and the stock is up 770% in that period.

TFI is a freight and trucking provider across Canada and the United States. There is nothing too flashy about its business. However, the key to its success has been excellent capital allocation, strong acquisitions, and smart management.

TFI has had some tough years due to a weak freight environment. Fortunately, volumes and pricing are starting to improve. It could be on the edge of a nice freight recovery. It’s a good time to own this stock in a TFSA.

Intact Financial

Intact Financial (TSX:IFC) is another great Canadian dividend growth stock. It yields 2% right now. However, IFC has compounded its dividend by an 11% annual rate since its initial public offering. It has increased its dividend for 21 consecutive years. The stock is up 219% in the past 10 years.

Intact is Canada’s largest property and casualty insurer. Its national scale has enabled market-leading pricing, while still earning very strong returns on equity.

This is a leading insurance stock in Canada. If you want a sector leader with a strong track record, Intact is a great dividend stock for a TFSA.