The market correction is giving Canadian investors seeking reliable passive income a chance to buy top TSX dividend stocks at discounted prices to build high-yield portfolios inside their self-directed Tax-Free Savings Accounts (TFSA).
TFSA limit
The TFSA limit is $6,500 in 2023. That brings the cumulative total contribution space to $88,000 for anyone who has qualified since the 2009 launch of the TFSA. In 2024, the TFSA limit will increase by at least another $6,500.
Profits earned inside a TFSA can be removed as tax-free income. In addition, any amount of money withdrawn from the TFSA opens up equivalent new contribution space in the following calendar year.
Best investments for TFSA passive income
Canadian stocks and Guaranteed Investment Certificates (GICs) are popular TFSA investments for people who want to generate passive income from their TFSA.
At the time of writing, investors can get GIC rates of up to 5.5%. Make sure the GIC is from a Canada Deposit Insurance Corporation member. As long as the amount is within the $100,000 threshold, the GIC is a risk-free investment. Retirees and other investors who are comfortable with a 5% return and do not need immediate access to the invested funds might be inclined to weigh their portfolios heavily to GICs. Interest can be paid monthly, semi-annually, or annually depending on the GIC terms.
Investors who require a higher yield or want to have emergency access to the principal might decide to tilt the bulk of the portfolio towards quality dividend-growth stocks. The pullback in the share prices of many top Canadian dividend stocks is driving yields well above the best GIC rates. Owning stocks comes with risks. The share price can fall below the purchase price, and dividends are not 100% safe. That being said, investors can find cheap dividend stars today with long track records of distribution growth.
Enbridge
Enbridge (TSX:ENB) is a good example of a great Canadian dividend stock that currently looks oversold and offers a high dividend yield. The board raised the dividend in each of the past 28 years, and investors should see steady increases continue, supported by the $17 billion capital program and any new strategic acquisitions.
In the first half of 2023, Enbridge reached an important agreement with customers to guarantee strong throughput on the Mainline pipeline for several years. The company is on track to put $3 billion in capital projects into service in 2023 and has spent $1.1 billion on acquisitions.
The balance sheet is in good condition, and Enbridge is buying back stock and paying generous dividends. In the second-quarter 2023 earnings report, the company said it is on target to hit its financial goals for the year.
Management expects earnings before interest, taxes, depreciation and amortization (EBITDA) to grow by 4-6% per year through 2025 and by about 5% beyond that timeline. This should provide solid support for dividend expansion.
Investors who buy ENB stock at the current price can get a 7.2% dividend yield.
The bottom line on TFSA passive income
Investors can easily put together a diversified portfolio of GICs and top TSX dividend stocks that would provide an average yield of 5.75% today. On a TFSA of $88,000, this would generate $5,060 per year in tax-free passive income. That works out to an average of $421.67 per month!
