Retirees: How to Use Dividend Stocks to Boost Pension Income and Avoid OAS Clawbacks

Here’s how retirees can increase pension income without paying more taxes or being hit with CRA clawbacks on OAS pension payments.

| 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

Canadian seniors want to get better returns from their savings without being bumped into a higher tax bracket or being hit by the OAS pension recovery tax.

CRA clawback

The CRA implements a clawback on OAS pension payments when net world income hits a minimum threshold. The amount to watch in 2020 is $79,054. At that point, every extra dollar of income triggers a $0.15 pension recovery tax, until net world income hits $128,137 when the full OAS pension for the year would be subject to the clawback.

While you might think $79,000 is very high, people who get pension income from a decent defined-benefit company plan along with full CPP and OAS pensions can quite easily hit the threshold. Once tax is paid on the pension income, the remaining cash available to cover living expenses might not leave much room for savings.

This is particularly true for retirees who might still have mortgage payments. Rising medical costs can also put a dent in the budget.

TFSA solution

One way to get more income while avoiding extra taxes is to generate the earnings inside a Tax-Free Savings Account (TFSA). The TFSA limit increased by $6,000 in 2020 and will likely rise by the same amount next year. The current cumulative contribution space is as high as $69,500 per person.

Putting money into GICs or government bonds won’t provide the yield most people require. As a result, dividend stocks are getting more attention. Stocks carry risk, as we witnessed in the first half of 2020, but top-quality companies should recover their valuations once the economy rebounds. In the meantime, investors have an opportunity to buy great dividend stocks at cheap prices.

Top dividend picks?

It makes sense to seek out market leaders with strong balance sheets and reliable dividends. Let’s take a look at one stock that might be an interesting pick to start a balanced TFSA income fund.

Royal Bank

Royal Bank (TSX:RY)(NYSE:RY) generated return on equity (ROE) of better than 17% last year, which makes it one of the most profitable large banks in the world. Even with the heavy provisions for credit losses recorded in fiscal Q2 2020, Royal Bank still had solid return on investment of 7.3%.

The bank’s capital position remains strong with a CET1 ratio of 11.7%, which means Royal Bank has the ability to ride out the downturn.

The stock currently trades near $91 per share and provides a 4.75% yield. Royal Bank traded at $109 earlier this year, so there is decent upside potential once the economy gets back on track.

Risks?

A second virus wave that forces new lockdowns would be negative for Royal Bank and its peers.

The company recorded $2.8 billion to cover potential loan losses in the fiscal Q2 report. However, the actual losses could be higher if the recession drags into next year.

The bottom line

Retirees can take advantage of the TFSA to boost income without paying more tax or being hit by the OAS clawback.

Top dividend stocks on the TSX Index appear cheap right now and it would be easy to build a diversified portfolio that provides an average yield of 5-6% today.

Should you invest $1,000 in Ishares S&p/tsx Canadian Dividend Aristocrats Index Etf right now?

Before you buy stock in Ishares S&p/tsx Canadian Dividend Aristocrats Index Etf, 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 Ishares S&p/tsx Canadian Dividend Aristocrats Index Etf 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 $21,058.57!*

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 38 percentage points since 2013*.

See the Top Stocks * Returns as of 2/20/25

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 Andrew Walker has no position in any stock mentioned.

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

dividends grow over time
Dividend Stocks

Income Investors: These Canadian Dividend All-Stars Are Raising Payouts Again

Long-term income investors can consider these Canadian dividend all-stars that are trading at good valuations.

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

Here’s How Many Shares of ZMI You Should Own to Get $500 in Monthly Dividends

This BMO monthly income ETF is diversified and easy to understand.

Read more »

dividends can compound over time
Dividend Stocks

Tariff Risks Are Rising: Here’s How to Stay Ahead as an Investor

Are you worried about tariffs? Worry no more and protect yourself with these three stocks offering protection.

Read more »

investor looks at volatility chart
Dividend Stocks

Market Correction: 3 Canadian Stocks to Buy Before Prices Rebound

These three Canadian stocks certainly offer a lot to investors, such as stability and value, but growth is definitely in…

Read more »

a person prepares to fight by taping their knuckles
Dividend Stocks

Tariff Trouble: How Canadian Investors Can Protect Their Portfolios

Canadian investors can protect themselves against Trump tariffs through diversification.

Read more »

Young Boy with Jet Pack Dreams of Flying
Dividend Stocks

Here’s How Many Shares of Peyto You Should Own to Get $100 in Monthly Dividends

Peyto Exploration and Development stock offers investors monthly income and exposure to the strong natural gas market.

Read more »

space ship model takes off
Dividend Stocks

Why Magellan Aerospace Could Be the Hottest TSX Stock in 2025

An industry consolidator with visible earnings growth could be the hottest TSX stock in 2025.

Read more »

sale discount best price
Dividend Stocks

TSX Sell-Off: These 2 Oversold Stocks Look Like Bargains Today

These Canadian stocks that have slipped into oversold territory but could offer promising value.

Read more »