Canadian investors are using their Tax-Free Savings Accounts (TFSAs) to build portfolios of top TSX stocks as part of their retirement planning program. One popular investing strategy involves owning great Canadian dividend stocks and using the distributions to buy new shares.
Power of compounding in a TFSA
Building wealth using the power of compounding is like rolling a snowball down a hill. Investors that direct dividends to buy new shares initially see only small benefits, but every additional share raises the next payout, which can potentially purchase even more shares, and so on. Over time, the impact on the size of the pension portfolio can be substantial, especially when dividends increase at a steady pace, and the share price gradually moves higher.
The TFSA limit is $6,500 in 2023. Investors who have qualified every year now have as much as $88,000 in TFSA contribution room. That’s large enough to build a meaningful retirement portfolio.
BCE
BCE (TSX:BCE) increased its dividend by at least 5% in each of the past 15 years. The stock is a traditional favourite among retirees seeking passive income due to its generous payout, but investors targeting total returns have also done well with BCE stock.
BCE gets most of its revenue from mobile and internet subscriptions. These are essential services, so the cash flow should hold up well during a recession. Even TV subscriptions should be sticky. This service is normally part of a bundle, and most people will give up other discretionary spending before they axe their home entertainment.
BCE trades near $59 per share right now compared to more than $70 at the 2022 high. The drop appears overdone, even as profits are expected to dip this year. BCE is targeting overall revenue growth and free cash flow growth in 2023.
Investors who buy BCE at the current price can get a 6.5% dividend yield.
Fortis
Fortis (TSX:FTS) is a utility company with $65 billion in assets located across Canada, the United States, and the Caribbean.
The businesses include power generation sites, electricity transmission networks, and natural gas distribution utilities. Households and corporations need power and fuel in all economic conditions, and 99% of the revenue Fortis generates comes from rate-regulated assets. As a result, cash flow tends to be predictable. This helps management make long-term planning for dividend increases.
Fortis raised the dividend in each of the past 49 years. The board expects to increase the distribution by at least 4% annually through 2027. That’s great guidance during uncertain economic times.
Fortis currently offers a 4% dividend yield. The stock is above the 12-month low but still looks good to buy today for a retirement portfolio.
The bottom line on top stocks for a TFSA
BCE and Fortis are good examples of top TSX dividend stocks that offer attractive distributions that should continue to grow. If you have some cash to put to work in a self-directed TFSA pension fund, these stocks deserve to be on your radar.
