A common option for Canadians seeking flexible, steady income is the Tax-Free Savings Account (TFSA). All interest, capital gains, and dividend income earned inside the TFSA grow 100% tax-free. Follow the Canada Revenue Agency’s (CRA) contribution and utilization rules, and you will have a tax shield for life.
However, making regular contributions and structuring a TFSA for steady income are two different things. When investing in dividend stocks, risk management is important. You need to have a structure built on balance, sustainability, and capital protection. If I were setting up a $25,000 TFSA today, here is how I would build a dividend portfolio.
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Sector diversification
Sector diversification is essential and indispensable in long-term dividend investing. Choose quality income providers across sectors to spread market risk. I’d allocate 30% ($7,500) to my anchor stock and 35% each ($8,750) in a high-yield engine and a defensive dividend grower.
With a weighted average yield of 4.4%, the potential annual income from a $25,000 investment is $1,105.75, or $276.44 every quarter, completely tax-free.
Financial – dividend compounder
Canadian Big Bank stocks are staples in a dividend portfolio. Bank of Montreal (TSX: BMO), the country’s oldest lender, is my anchor holding and dividend compounder. The $167 billion bank is also TSX’s dividend pioneer, with an illustrious payment record spanning 197 years and counting.
At $234.52 per share, the dividend yield is 2.9%. BMO generates predictable cash distributions you can reinvest tax-free plus long-term capital appreciation. The total return in 20 years is plus-746.2%, representing a solid 11.3% compound annual growth rate (CAGR).
BMO targets a 15% return on equity (ROE) by the end of fiscal 2027, with 40% of its overall earnings coming from across the border. Bank CEO Darrly White expects overall profit growth in the U.S. to accelerate after the 2023 acquisition of Bank of the West.
Energy – high-yield engine
Industry giant Enbridge (TSX: ENB) is a high-yield engine with a relatively low-risk profile. The $150.4 billion energy infrastructure company sees visible growth from its diversified portfolio of gas transmission, liquid pipelines, gas distribution and storage, and renewable power assets.
An $8,750 allocation buys nearly 131 shares ($66.59 share price). ENB pays a hefty 5.7% dividend and could increase it, given its 31-year dividend growth streak and dividend growth guidance of up to 5% in post-2026. The company said $37 billion in secured growth capital is scheduled to enter service through 2030.
Utilities – defensive dividend grower
Capital Power (TSX: CPX) in the utilities sector offers both defensive income and dividend growth. The $9.8 billion growth-oriented independent power producer (IPP) supplies electricity and provides energy services to commercial, industrial, government, and institutional customers across Canada and the United States. Its power generation assets include natural gas, thermal, and wind and solar renewables.
If you invest today, CPX trades at $62.79 per share, with a 4.5% yield. This dividend-growth stock has raised its dividend for 13 consecutive years and hasn’t missed a payout since the third quarter of 2009. Its long-term supply contracts and power purchase agreements (PPAs) provide predictable revenue visibility.
Long-term holdings
I’d pay to own shares of Bank of Montreal, Enbridge, and Capital and hold them long term in a TFSA. The stock portfolio could endure any market environment and deliver tax-free cash flow.
