Canadians saving for retirement should focus on deriving inflation-beating returns. One asset class that has successfully outpaced inflation and created game-changing wealth over the long term is equities.
Moreover, dividend stocks have historically outperformed the broader markets as these companies report consistent profits, a portion of which is distributed to shareholders. So, by holding blue chip dividend stocks in a TFSA (Tax-Free Savings Account), you can create a predictable passive income stream and benefit from capital gains as well.
All returns in a TFSA are sheltered from Canada Revenue Agency taxes, making it one of the most popular registered accounts in Canada.
Canadian residents can also delay their CPP (Canada Pension Plan) payouts. Doing so will result in higher payouts. For instance, for every month the CPP is delayed, the payment will increase by 0.7%. So, if the CPP is delayed by five years, your payments will rise by 42%.
Here are two TSX dividend stocks you can hold in a TFSA to supplement your CPP and create passive income for life.
Canadian Utilities stock
One of the most popular dividend stocks on the TSX, Canadian Utilities (TSX:CU) offers a dividend yield of 5%. With more than $22 billion in assets, Canadian Utilities is a global energy infrastructure giant that offers solutions in verticals such as:
- Utilities: Electricity and natural gas transmission and distribution
- Energy Infrastructure: Energy storage, energy generation, clean fuels, and industrial water solutions
- Retail Energy: Electricity and natural gas retail sales
Canadian Utilities has increased dividends for 51 consecutive years, the longest record among TSX companies. It aims to grow dividends in-line with earnings growth which, in turn, is linked to expansion from regulated and contracted investments.
Canadian Utilities expects to invest over $4 billion in its regulated utility and commercially secured energy infrastructure through 2025. These investments should drive future cash flows higher. Priced at 15.5 times forward earnings, Canadian Utilities stock is priced at a discount of 10% to consensus price target estimates.
Enbridge stock
Another high-yield TSX stock is Enbridge (TSX:ENB), which currently yields over 7%. While Enbridge is part of a highly cyclical sector, the company has increased dividends for 28 consecutive years at an annual rate of 10%, showcasing the resiliency of its business model.
Despite falling oil prices, Enbridge increased adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) by 8% to $4.5 billion in Q1 of 2023. Its distributable cash flow per share increased by 3% to $1.57 per share, indicating a payout ratio of less than 60%.
Enbridge expects to end 2023 with adjusted EBITDA between $15.9 billion and $16.5 billion, compared to $14 billion in 2021. Its distributable cash flow per share is also forecast to rise between $5.25 and $5.65 per share from $4.96 per share in this period.
Additionally, less than 5% of its debt portfolio is exposed to floating interest rates, making it almost immune to recent hikes in bond yields. Enbridge’s cash flows are backed by long-term contracts, which are indexed to inflation.
The TSX stock is priced at a discount of 16% to consensus price target estimates. After accounting for dividends, total returns will be closer to 23%.
