If you have a diversified portfolio of quality dividend stocks in your Tax-Free Savings Account (TFSA) that generate a growing passive income stream, you could have a smooth transition into retirement. The idea is that you don’t necessarily need to sell stocks to make sufficient income from dividends or cash distributions. On the other hand, you might have growth stocks like Brookfield Corporation (TSX:BN) that potentially require active investing to create greater wealth.
Best dividend stocks for retirement
Dividend stocks like Toronto-Dominion Bank (TSX:TD) and Brookfield Infrastructure Partners L.P. (TSX:BIP.UN) are excellent options for raising passive income in the TFSA.
To illustrate, TD Bank’s 15-year dividend growth rate is about 8.4%. This growth hasn’t changed much. Its five-year dividend growth rate is about 8.7%, and its latest dividend hike was 7.9%. Notably, the bank stock has had a meaningful pullback of about 20% from its 2022 peak, which makes it a good opportunity to buy the dip.
At $80.87 per share, investors can now grab shares with a more attractive starting yield of roughly 4.7%. Assuming a moderate earnings-per-share growth rate of 6% and reversion to the mean valuation, the Canadian bank stock could deliver total returns of more or less 13% per year over the next five years.
Brookfield Infrastructure also offers a good distribution yield of about 4.3%. It has increased its cash distribution like clockwork every year since it began trading publicly on its own in 2008. Across the globe, it owns and operates a diversified portfolio of quality long-life infrastructure assets that generate substantial cash flows.
It targets long-term returns of 12–15% per year through investing in quality assets on a value basis, improving its assets, and recycling capital from mature assets. Brookfield is also committed to increasing its cash distribution by at least 5% annually.
At $47.04 per unit at writing, the analysts’ consensus view is that the top utility stock trades at a discount of about 17%.
Securing your TFSA with growth stocks
Mixing in some growth stocks in your TFSA could secure greater wealth for your retirement. In particular, for growth stocks like Brookfield Corp. which have cyclical earnings and pay little to no dividend yields, investors should aim to buy shares opportunistically and target price appreciation. For the greater risk and volatility that investors are taking in Brookfield, the company targets to deliver compound annual returns of at least 15% for the long haul.
Brookfield is the parent company of Brookfield Infrastructure and other businesses, including asset management, insurance solutions, renewable power, commercial real estate, and private equity. The stock is about 15% lower from its peak this year. So, it could be a good buy on the correction. At $43.60 per share, the analysts’ consensus view is that the stock is undervalued by 30%!
Investor takeaway
For both dividend stocks and growth stocks, investors should aim to buy wonderful companies at good valuations (that is, at a discount if possible). Of the three stocks discussed, Brookfield is the cheapest and could deliver the highest returns over the next five years, but investors would be taking on greater risk as well. TD Bank and Brookfield Infrastructure are more defensive picks, as they provide regular returns from their dividends and cash distributions, respectively.
