With the cost of living constantly rising, retirees and other investors are looking for ways to generate a steady stream of passive income to complement other earnings sources, including CPP, OAS, and work pensions.
One popular strategy involves using a self-directed Tax-Free Savings Account (TFSA) to hold a mix of GICs and top Canadian dividend stocks.
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TFSA contribution limit
The TFSA contribution limit is $7,000 in 2026. This brings the cumulative maximum contribution space per person to $109,000. That’s large enough for a retiree to create a nice fund for generating tax-free passive income.
GIC rates moving higher
Rates offered on GICs have trended higher this year, following the upward move of yields on government bonds. In recent weeks it was possible to get five-year non-cashable GICs offering rates near 4.4% from Canada Deposit Insurance Corporation (CDIC) members. Rate have since pulled back a bit, but investors can still get non-cashable GIC rates of 4% or higher for terms ranging from two to five years. This is comfortably above the current rate of inflation in Canada, which came in at 3.1% in the last report. As such, it makes sense to consider GICs right now for an income portfolio.
The investment is 100% guaranteed as long as the GIC is issued by a CDIC member and the amount is within the $100,000 threshold. The downside is that the best rates are offered on non-cashable certificates, so the money is locked up for the term of the GIC. In addition, the rate is fixed for the term. If rates move significantly higher, there is a potential missed opportunity to get better returns.
Dividend growth is great for income investors
The TSX is home to many stocks that have delivered steady dividend growth for investors for decades. Each time a dividend payment is increased it raises the yield on the initial investment. Consistent dividend increases can help offset inflation as the passive income increases.
Enbridge (TSX: ENB) is a good example of a top Canadian dividend-growth stock that also offers an attractive yield.
The company is a giant in the North American energy infrastructure industry with a current market capitalization near $150 billion. Enbridge has the size and the financial clout to grow through a combination of strategic acquisitions and internal development projects. The current secured capital plan is above $40 billion. As the new assets are completed and go into service, the bump to distributable cash flow is expected to run about 5% annually over the medium term. This, along with earnings contributions from acquisitions, should enable the board to continue raising the dividend. Enbridge has increased the distribution in each of the past 31 years. Investors who buy ENB at the current price can get a dividend yield of 5.7%.
Stocks can provide higher yields than GICs, but they come with capital risk. Share prices can fall below the purchase price and dividends can be cut if a company runs into cash-flow issues. On the upside, stocks that have long track records of dividend growth tend to move higher over the long run. In addition, stocks can be sold at any time to access the cash. This provides good liquidity in the event there is an emergency need to access invested savings.
The bottom line
The best mix of GICs and dividend stocks is different for every person depending on the required returns, risk appetite, and need for quick access to the cash. In the current market conditions it is quite easy to build a diversified portfolio of GICs and dividend stocks to generate an average yield near 4.5%. On a TFSA of $109,000 this would generate $4,905.00 per year in tax-free passive income. That averages out to $408.75 per month!
