Young investors are using their Tax-Free Savings Accounts (TFSAs) to build retirement portfolios of top TSX dividend stocks. The market correction that occurred over the past year is giving investors another chance to buy great Canadian stocks at discounted prices.
TFSA benefits
The TFSA offers flexibility that might be attractive for young investors. Cash can be pulled from the TFSA at any time without a penalty, and the amount of the withdrawal opens up new contribution space in the following calendar year.
For example, a person might need to access the cash for an emergency or to fund a different investment.
Young investors can also benefit by making the TFSA their primary retirement portfolio while they build up Registered Retirement Savings Plan (RRSP) space. Contributions to RRSPs reduce taxable income, so it makes sense to make the contributions when a person is in a high marginal tax bracket. This tends to be in the middle or late years of a career.
All income generated inside a TFSA is tax free. This makes the TFSA attractive for holding top dividend stocks that can generate a steady stream of passive income or reinvested to take advantage of the power of compounding.
TD Bank
TD (TSX:TD) has a great track record of dividend growth. In fact, the compound annual growth rate is better that 10% over the past 25 years.
TD stock is down considerably from the 12-month high. At the time of writing, investors can buy TD shares for close to $83 compared to $93 in March.
Bank stock fell out of favour over the past year, as investors became worried that soaring interest rates would cause businesses and homeowners to default on loans. The recent slide in the bank sector is due to the surprise failures of banks in the United States and Europe.
TD is trying to close its US$13.4 billion acquisition of First Horizon, a regional bank in the southeastern part of the United States. The failure of small banks in the United States and the plunge in the share price of First Horizon far below TD’s takeover offer could be putting added pressure on TD’s stock.
Near-term volatility should be expected, but TD looks cheap right now and should deliver decent long-term total returns. At the time of writing, the stock provides a yield of 4.6%.
BCE
BCE (TSX:BCE) is a giant in the Canadian communications sector with wireless and wireline networks delivering essential mobile and internet services to residential and commercial clients across the country. BCE also has a large media group with assets that include the CTV television network, specialty channels like BNN, radio stations, online platforms, and interests in a number of pro sports teams. BCE also owns a retail network, The Source, as well as other businesses.
The company has the balance sheet strength to make the investments needed to protect its competitive position and to ensure it provides the broadband services its customers need.
BCE should be a good stock to own during a recession due to the reliability of the mobile and internet subscription revenues. Free cash flow is expected to increase in 2023, so investors should see another decent dividend hike in 2024.
BCE raised the dividend by at least 5% in each of the past 15 years.
The stock trades for close $64 at the time of writing compared to the 12-month high around $74. Investors who buy at the current level can get a 6% dividend yield.
The bottom line on top TFSA stocks
TD and BCE pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA, these stocks appear cheap today and deserve to be on your radar.
