Most TSX dividend stocks follow a quarterly payout schedule. The reason for paying out quarterly is simple: Corporate reporting in each earnings season happens after every three months. This helps the payouts align with the earnings season, making these assets ideal due to the predictable cycle for investors who want recurring income through their self-directed investment portfolios.
The Tax-Free Savings Account (TFSA) was introduced in 2009 as a tax-sheltered tool to encourage Canadians to save more. Any contributions you make to a TFSA get a permanent tax shield because you contribute with after-tax dollars. It means that the returns you generate from holdings in the account can grow your wealth without incurring taxes.
While that holds true for interest income from cash held in the account, the tax-sheltered status of the TFSA isn’t limited to the cash you hold. Instead, using some of the contribution room to hold high-quality dividend stocks can deliver far better returns. Why? Because besides interest income, any income that eligible holdings generate in terms of dividends or capital appreciation also remains tax-free.
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An ideal long-term TFSA holding
If you’re an income-focused investor, the TFSA can be the perfect investment vehicle to create a passive-income stream for yourself. By building up a portfolio of blue-chip stocks that pay quarterly distributions regularly and reliably, you can set yourself up for a comfortable retirement. To this end, I will discuss one TSX dividend stock that can fit the bill for such a portfolio.
Pembina Pipeline (TSX: PPL) is a $39.28 billion market-cap TSX energy company that provides transportation and midstream services to the energy industry. The reason this energy infrastructure giant can be a good fit for long-term dividend investing in a TFSA is its 29-year track record of paying quarterly distributions and five consecutive years of increasing payouts to investors.
In order to support regular distributions, a dividend stock must have a durable cash flow. The midstream provider has been operating since 1954, and its portfolio includes a pipeline network alongside facilities for transportation, storage, natural gas processing, and exports.
The company generates over 70% of its revenue from long-term fee-for-service contracts. This means that the price fluctuations of the fossil fuels it transports do not directly impact its financial performance. Instead of getting paid based on the value of energy products it transports, PPL charges based on volume.
Currently, Pembina has fixed-fee agreements set for the long run with three industry-leading energy producers, which can support its dividend distributions and potential dividend hikes for years. The stronger demand for exports amid geopolitical tensions in the Middle East means potentially more business for Pembina.
Foolish takeaway
There was a time when PPL stock paid monthly distributions to investors, but the company’s management decided to change the policy to quarterly distributions three years ago. As of this writing, PPL stock trades for $67.54 per share, and after its recent dividend hike, it pays $0.735 per share each quarter, translating to a 4.35% annualized dividend yield that you can lock into your portfolio. If you don’t need the returns immediately, you can reinvest the dividends to purchase more shares of the stock, unlocking the power of compounded growth to accelerate your wealth generation.
