TFSA Income Investors: How to Create a 5% Yielding Dividend Growth Portfolio

You could create a safe 5% yielding TFSA portfolio of Canadian dividend growth stocks without taking on much risk with Royal Bank of Canada (TSX:RY)(NYSE:RY) stock and another relatively safe name.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

As the allowable maximum total contributions reach $69,500 with another $6,000 deposit limit for 2020, the Canadian Tax-Free Savings Account (TSFA) is now a significant investment and tax-planning tool offering residents the opportunity to create a perpetually tax shielded retirement portfolio.

The tax-free account can be structured to generate frequent, regular and reliable income streams during retirement, with target yields as  lucrative as 6% per annum and a very reasonable risk profile to augment RRSP, CPP and other pension payouts.

Scoop the Royal Bank of Canada’s (RBC) near 4% yield

The country’s biggest chartered bank by market capitalization, the Royal Bank of Canada’s (TSX:RY)(NYSE:RY) stock underperformed the broad Canadian equities market (as represented by the S&P/TSX Composite Index) over the past year, as a generally negative investor sentiment weighed on the Big Five chartered banks’ valuation in 2019 to give long-term dividend growth investors some good initial yields on costs currently.

Shares in RBC yield a juicy 3.97% today, and once captured, this yield could grow with time provided the bank sticks to its traditional dividend growth policy as it continues to generate higher revenues and increasing its earnings per share.

Analysts expect RBC to grow its earnings per share by an average of 6% annually between fiscal years 2020 and 2022 as the bank’s market grows and the local housing sector’s activity firms. The bank’s well-covered quarterly dividend could grow with earnings too.

While the payout might not grow as fast, if management increases the dividend by 36% in the next five years as they did historically, new investors today could be harvesting a 5.4% annual yield by 2023.

This is the beauty of dividend growth investing.

Augment income with Enbridge’s 6% yield

Energy infrastructure and utility giant Enbridge (TSX:ENB)(NYSE:ENB) has never missed a dividend pay-out over the past 66 years, and management has been increasing the well covered quarterly dividend by an average of 10% over the past three years to 2020.

Shares yield a juicy 6% today, and we could see a further 5-7% annual dividend growth rate over the next three years, as the company has increased its capital expenditure program on business expansion projects in order to sustain a recently strong growth in operating earnings (as measured by EBITDA) and distributable cash flows.

The yield on today’s cost could top 7% by 2023 if the dividend is increased at the low end estimate of 5% per year to 2023. As well, there could be some significant capital gains on this otherwise recently sideways trading stock that’s seen the share price underperform, operating efficiency improvements, a stellar earnings performance, and strong cash flow generation.

Take note that this lousy stock could potentially generate significant total returns in the long term.

How to create a 5% yielding portfolio?

By allocating the 2020 contribution equally among the two stable and defensive stocks, the total yield on new money would be a respectable 5% for 2020. Naturally, I would expect the annual yield to grow to a juicier 6.2% by 2023 based on dividend growth expectations alone.

The two picks can also serve as core holdings, and you could allocate some of the old TFSA deposits into them, but remember to keep the portfolio reasonably diversified in order to avoid this risk.

Reinvesting any payouts during the period could further compound the income growth rate for a more relaxed, tax-free and financially secure retirement.

Should you invest $1,000 in Meta Platforms right now?

Before you buy stock in Meta Platforms, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Meta Platforms wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Brian Paradza has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

senior relaxes in hammock with e-book
Dividend Stocks

How I’d Invest $8,200 in Canadian Monthly Dividend Stocks to Pay for My Retirement Lifestyle

If you have some cash on hand, then these monthly dividend stocks can provide you with cash for life.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Here’s Exactly How $20,000 in a TFSA Could Grow to $300,000

Can you grow $20,000 into $300,000 by holding the iShares S&P/TSX Index Fund (TSX:XIC) in a TFSA?

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Use $15,000 in a High-Yield Dividend ETF for Steady Passive Income

This ETF has it all, a strong portfolio of dividend payers, along with a high yield for investors.

Read more »

Person holds banknotes of Canadian dollars
Dividend Stocks

A 9.9 Percent Dividend Stock Paying Cash Every Month

If you are looking to park your money for the short term and earn from it, this 9.9% dividend stock…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Have Room in Your TFSA? 1 Canadian Dividend Champion for April Investors

If you've got extra cash in your TFSA, the latest dip in markets may provide you with a golden opportunity…

Read more »

engineer at wind farm
Dividend Stocks

Beginner Investors: How I’d Allocate $5,000 in 2 Safe Dividend Stocks

There are plenty of great dividend stocks on the market, but these two are buy-and-forget candidates that will boost your…

Read more »

grow money, wealth build
Dividend Stocks

Invest $25,000 in These 3 Dividend Stocks for $1,600 in Annual Income

These three Canadian dividend stocks could deliver a reliable passive income of over $1,600 annually.

Read more »

Woman in private jet airplane
Dividend Stocks

Why I’d Start My Investing Journey With $7,000 in 4 Foundational Stocks

These four stocks have high-quality and reliable operations, making them among the best long-term investments in Canada.

Read more »