Traditionally, most Canadians relied on registered retirement savings plans (RRSPs) as their primary income engines. This strategy made sense for a long time. The RRSP offers a tax deduction on contributions and lets you defer taxation until the time of withdrawal. As a result, you can enjoy a lot of tax-free compounding in an RRSP.
However, the RRSP comes with one fatal flaw – at least for those who intend to withdraw before retiring:
Potentially high taxes on withdrawals.
Because RRSPs are tax-deferred rather than tax exempt, the taxes incurred on withdrawals can be high if you make them while still working. Also, the RRSPs tax benefits are the greatest the more years of compounding you have, meaning that the RRSP incentivizes delaying withdrawals until later in life.
For years, Canadians were stuck without a good alternative, seeing the RRSP as the only way to (sort of) shelter investment gains from taxation while living in their country of origin.
But in 2009, a new innovation hit the market: the tax-free savings account (TFSA). Offering tax-free compounding and withdrawals, this account provided more flexibility to withdraw funds during one’s working life.
Since 2021 or so, I’ve been investing more money into my TFSAs than my RRSP. It has worked out well so far. While I rarely make withdrawals from my TFSA, I do so occasionally, and I wouldn’t be able to make similar RRSPs withdrawals without tax consequences. So, I now see the TFSAs as my primary income engine rather than my RRSP. In the next section, I’ll explore two stocks that I’m using to generate passive dividend income in my TFSAs.
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TD Bank
The Toronto-Dominion Bank (TSX: TD) is the largest dividend stock position in my portfolio. I actually sold a sizeable portion of the position earlier this year, but it remains one of my biggest positions, and the biggest position with an above-average dividend yield.
TD is likely familiar to most readers. As the nation’s second largest bank, it’s kind of hard to miss. Still, a few things are worth noting about it:
- TD has sizeable U.S. operations, including a retail bank centred around the East Coast, and an investment bank. These operations contribute about 35%–40% of TD’s net income, depending on the quarter.
- TD is a fiscally responsible bank, with high capital and liquidity ratios. Basically, it’s a defensive lender that doesn’t take on unnecessary risks – this is a positive quality in a bank over the long term.
At today’s price, TD yields about 2.6%. It’s not quite the high yielder that it was when I was actively buying it in late 2024. Still, it’s a pretty sensible stock with a fairly high yield.
Brookfield Asset Management
Brookfield Asset Management (TSX: BAM) is a relatively small position for me. I hold a much larger position in the parent company, Brookfield Corp. I bought some BAM earlier this year when I thought it had gotten too beaten up. Brookfield Corp stock was falling in price at the time as well, but at the point earlier in the year when I bought BAM, the latter was falling in price relative to the former. Brookfield stock has largely held its value since I bought it, while BN has declined in price further, so I think diversifying some funds into direct BAM holdings at the time I did was a smart move.
BAM’s main claim to fame is its asset light business model. It has basically no hard assets, and very little debt. The lack of such entanglements gives BAM very high profit margins. The company is also well connected in the institutional investing world, which helps it to raise money. Overall, BAM is a very promising company, and its stock boasts a juicy 4.3% dividend yield.
