The secret to steady monthly payouts is diversification. With so many dividend stocks slashing dividends, investors are looking for stability. Stability comes at the cost of lower yield. And diversifying your investments ensures that if the payouts from one source slow or stop, they continue from other sources. But to achieve this rhythm of cash flows, you need to strategically diversify your Tax-Free Savings Account (TFSA) and structure your portfolio for downside risk.
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Common mistakes in portfolio structuring
When diversifying, the most common mistake investors make is over-diversifying in 20-30 stocks. Another mistake is buying stocks of competitors, which operate in the same industry and face the same risk, removing the essence of diversification.
While diversifying your portfolio, ensure you invest in stocks that are contrarian to an event. For instance, when oil prices rise, oil stocks rise while retail and real estate stocks fall due to rising inflation. When interest rates rise, bank stocks rise while gold stocks and companies with high leverage fall.
Hence, the right way to diversify is to buy oil stocks and corresponding real estate stocks, bank stocks, and corresponding gold stocks. You can also time the purchase.
How to structure a $7,000 TFSA contribution for steady monthly payouts
In the current scenario, oil and bank stocks are trading near their highs, which means now is a good time to buy real estate and gold stocks.
SmartCentres REIT (TSX: SRU.UN) and Granite REIT are worth considering. Their unit prices touched a 52-week high in July and dipped 9.8% and 11% in August as oil prices surged past US$95/barrel. This has inflated their dividend yields to 6.72% and 4%, respectively. Among the two, I prefer SmartCentres.
SmartCentres caters to retail stores, largely Walmart and Walmart-anchored stores. A 23% rental income from a tenant like Walmart ensures dividends are coming. The real estate investment trust (REIT) has been paying dividends for 24 years and has grown them in some years. However, it has high leverage, as 12% of its total assets are under development, one of the highest among Canadian REITs. This has blocked significant capital until the projects are completed.
SmartCentres survived the 2022-2023 interest rate spike by halting development projects. While it reassures unitholders that management has debt under control, another significant spike could be detrimental for the REIT. That’s where oil stocks can mitigate the risk.
How to place oil stocks in your portfolio structure
If you look at 2022-2023, Canada’s largest energy stocks, Suncor Energy (TSX: SU) and Canadian Natural Resources, increased their dividends significantly while their share price remained volatile.
| Year | Suncor Dividend per share | YoY Growth | Canadian Natural Resources Dividend per share | YoY Growth |
| 2023 | $2.08 | 10.60% | $1.85 | 19.30% |
| 2022 | $1.88 | 79% | $2.30 | 55.20% |
| 2021 | $1.05 | $0.999 |
If we put the August 2026 stock price charts of Suncor and Smart Centres REIT together, you can see the contrarian impact play out as oil prices rise. This impact may not always work, as the central bank’s interest rate decisions also play a role. When the Fed did not hike interest rates in July, real estate stocks surged alongside oil stocks.
The role of TFSA in your income-paying portfolio structure
While building a monthly payout portfolio, you should also consider the tax implications. Every dividend is taxed. But if you invest in dividend stocks through a TFSA, you are shielded from paying dividend tax.
- Firstly, a TFSA lets your investment grow tax-free and allows you to withdraw the dividend tax-free. Tax-free dividend withdrawals are not something other registered accounts offer.
- Secondly, you can reinvest TFSA withdrawals when the contribution room is reset on January 1. Again, something you won’t find in other registered accounts.
- Lastly, TFSA withdrawals do not affect your retirement benefits, such as Old Age Security (OAS) and Guaranteed Income Supplement (GIS), which are calculated on your taxable income.
Final takeaway
When structuring your portfolio, consider all aspects, from how stocks interact with macro events to the tax on dividend income and how these payouts interact with your other cash benefits.
