Since dividends and capital gains earned within a Tax-Free Savings Account (TFSA) are tax-free, investing in dividend-paying stocks through this account can be a solid strategy for generating sustainable, tax-efficient passive income. By allowing investment returns to compound without a tax burden, investors can enhance long-term portfolio growth and income.
To make this strategy more effective, focus on the quality and financial strength of the stocks. Dividend stocks supported by strong fundamentals, stable earnings, solid free cash flow, and prudent capital allocation are better equipped to sustain and grow their distributions.
Against this background, here are two TSX dividend stocks worth considering for TFSA passive income.
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TSX dividend stock #1: Bank of Montreal
Bank of Montreal (TSX: BMO) is an attractive dividend stock to add to a TFSA for passive income. Its solid dividend distribution and growth history, diversified business operations, and sustainable payout ratio make it a reliable income stock.
BMO has a remarkable dividend track record, having paid dividends for 197 consecutive years. Over the past 15 years, the Canadian banking giant has increased its dividend by an average of 5.7% annually. Its diversified revenue streams support its payouts, efforts to control operating costs, strong credit quality, and a healthy balance sheet.
Looking ahead, BMO has several growth drivers that could support earnings and payouts. Solid momentum in Capital Markets and Wealth Management, along with commercial lending opportunities in Canada and the U.S., could drive revenue expansion. Its strong credit performance and diversified loan portfolio augur well for earnings growth.
Capital allocation remains another important component of BMO’s long-term strategy. The bank is directing resources toward opportunities that can generate sustainable shareholder value, including expanding profitable lending activities, investing in human capital, modernizing its technology infrastructure, and strengthening artificial intelligence (AI) capabilities.
Overall, Bank of Montreal is well-positioned to pay and increase its dividend in the years ahead, making it a reliable passive income stock for a TFSA.
TSX dividend stock #2: Fortis
Fortis (TSX: FTS) is one of the best dividend stocks to hold in a TFSA for passive income. The utility company’s regulated utility operations generate relatively stable cash flows, even during uncertain economic conditions, supporting its payouts. Since the company primarily focuses on electricity transmission and distribution rather than power generation, it also has less exposure to fluctuations in electricity prices.
Fortis recently increased its quarterly dividend by 4%, extending its impressive record of 53 consecutive years of dividend growth. Management expects to maintain annual dividend increases of 4–6% through 2031, supported by stable cash flows and long-term growth opportunities.
An important driver of this growth is the company’s planned $32.2 billion investment by 2031, which is expected to expand its rate base to $63.9 billion. A larger rate base should support higher earnings over time, providing more room for future dividend increases.
Fortis’ prospects remain solid as the utility company will gain from rising electricity demand across North America and investments in electricity networks and grid modernization.
Overall, its low-risk business model, expanding rate base, and dividend growth make Fortis an attractive passive income stock.
