Canadians can be financially secure in retirement with higher Canada Pension Plan (CPP) payments and a Tax-Free Savings Account (TFSA) balance producing substantial pension-like, tax-free income. However, achieving both requires disciplined planning.
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Twin strategy
Not all receive the maximum CPP benefit of $1,364.60 (January 2024) unless you’ve made the maximum contribution each year for at least 39 years. Otherwise, you can expect to receive the average monthly retirement pension of $831.92 at age 65. But if you wish to receive $1,214.60 (a 42% permanent increase), delay claiming your CPP until 70.
For the TFSA, regular contributions is the key to maximizing the investment account’s tax-free money growth feature. Ideally, you should maximize the annual limits and invest in dividend stocks. Reinvest the dividends for faster compounding of the principal. While TFSA withdrawals are tax-free, hold back withdrawing funds until you have enough passive income to live on in retirement.
The CPP replaces part of pre-retirement income, not 100%. Fortunately, you can fill the shortfall through your TFSA and dividend stocks. The power of compounding comes into play when you don’t pocket the dividends and instead reinvest them.
Bedrock of stability
Canada’s Big Five Banks are bedrocks of stability, and all have been paying dividends for more than a century. As of this writing, the Canadian Imperial Bank of Commerce (TSX:CM) is the top performer year-to-date. At $81.59 per share, the market-beating return is 32.8%. If you invest today, the dividend yield is 4.1%.
The $77.1 billion bank’s dividend track record is 156 years and counting. Moreover, the quarterly payouts should be safe and sustainable, given the 51.7% payout ratio. For illustration purposes, 650 CIBC shares ($53,033.50 investment) will balloon to $102,391.50, including dividend reinvestment, in 15 years. Your money would compound some more in a more extended holding period.
CIBC picked up momentum after beating earnings estimates and falling interest rates. In Q3 fiscal 2024 (three months ending July 31, 2024), revenue and net income increased 13% and 25% respectively to $6.6 billion and $1.8 billion compared to Q2 fiscal 2023. Notably, the provision for credit losses (PCL) declined 52% year-over-year to $483 million.
Its President and CEO, Victor G. Dodig, credits the client-focused strategy and diversified North American platform for the solid quarterly results. Expect CIBC to deliver quality earnings as the economic environment improves.
Perfect complement
A perfect complement to CIBC is Canadian Natural Resources Limited (TSX:CNQ). This large-cap energy stock is a dividend aristocrat, owing to 24 consecutive years of dividend hikes. The $99.8 billion company is also major player in Canada’s oil and gas exploration and production industry.
At $46.92 per share (+11.8% year-to-date), the dividend offer is nearly the same as CIBC’s (4.4%). Canadian Natural Resources owns diverse assets in Western Canada, the U.K., the North Sea, offshore Africa, and other international locations. Rising natural gas prices in Q4 2024 will increase production and drive revenue and gross profit.
Best of the best
CIBC and Canadian Natural Resources are the best of the best in October. Whether you’re bridging the income gap of your CPP or building retirement wealth via the TFSA, both stocks can help achieve your financial goals.
