Low risk ways to build a TFSA

Every year at this time Canadians get a rare gift from Ottawa. It allows us to grow our savings tax free, in perpetuity.

It’s officially called the Tax-Free Savings Account (TFSA) although in an interview some years ago, Dave Chilton, better known as The Wealthy Barber, called it the Totally Fantastic Saving Account. That one-upped the late Finance Minister Jim Flaherty who launched TFSAs in the 2008 federal budget. Mr. Flaherty, with less hyperbole but equal enthusiasm, called it the most important personal finance vehicle since the launch of Registered Retirement Savings Plans.

In the intervening 16 years, TFSAs have become a big piece of our savings strategy. About 14 million Canadians over the age of 18 have one. Collectively, we have $276 billion stashed away in them, according to the Canada Revenue Agency.

On New Year’s Day, the annual contribution limit was increased to $7,000 a $500 increase from last year. The limit is indexed to inflation and it was the second increase in two years.

If you haven’t opened a TFSA, make a New Year’s resolution to get going. The cumulative amount available to you is $95,000.  

Unlike RRSPs, which offer a tax break for a contribution, TFSA contributions are made with after-tax dollars. But your money grows tax-free inside the plan and withdrawals are also tax-free. Any amount withdrawn from your TFSA can be redeposited in the next calendar year, in addition to the annual limit.  

Here are a few thoughts for income-oriented investors looking for ways to use their contribution room from my recent article in The Income Investor newsletter. 

For dividend income: Dividend paying stocks performed poorly last year. Fixed income investments became relatively more attractive as interest rates rose and were also perceived as safer bets.

A good place to find this year’s winners is in last year’s blue-chip losers.

Just before Christmas, Globe & Mail market strategist Scott Barlow published a list of the highest yielding TSX stocks. The Top three were Allied Properties REIT (TSX: AP.UN) with an 8.6% yield, Gibson Energy (TSX: GEI) with a 7.53% yield, and Enbridge Inc. (TSX: ENB) with a 7.37% yield.  (The Globe article is found here, but is for subscribers only.)

Dividend income and conservative growth: The stocks fall in and out of favour, but these companies offer the best of both worlds for patient investors. They grow with the economy, have proven businesses, and a history of profitability. They sell goods and services that are always in demand. And, of course, the stocks pay dividends which tend to rise on a regular basis. It doesn’t get much better.

Banks, telecoms, and utilities are included in this group. BCE Inc. (TSX: BCE), Canada’s largest telecom company, is yielding 7.1% at the time of writing. BCE has increased its dividend in each of the last 15 years and will increase it again this month. Telus Corp. (TSX: T), the second largest telco, has a more entrepreneurial flavour and raised its dividend in November. It also has a commitment to annual dividend increases. The stock’s current yield is 6.93%.  

TC Energy Corp. (TSX: TRP), the pipeline operator, had a rocky year, but is still delivering annual dividend increases of 3-5%. It is yielding a high 6.9%.

The best yields among the major banks are found at Scotiabank (TSX: BNS) with a yield of 6.7%, and Canadian Imperial Bank of Commerce (TSX: CM), which is yielding 5.6%.  

Looking for bonds: Part of the 2024 investment equation for bonds is a chance for capital gains along with interest. If rates fall, bonds and bond funds will be winners. 

Among them is the iShares Core Canadian Long Term Bond Index (TSX: XLB) which invests in a portfolio of long-term Canada bonds with a maturity of more than 10 years. Another is the BMO Aggregate Bond Index ETF (TSX: ZAG). It is the most popular bond ETF in Canada with $6.7 billion in assets. 

Not sure what to do: For investors awaiting confirmation of a change in market fortunes there are some short-term options.

One is GICs, where shopping around can uncover one-year returns above 5%. That is something we are unlikely to see a year from now. But you must lock in to get these high rates, so if you are thinking of using the cash to dip back into the market, they are not an option. A good place to comparison shop for the best rates and terms is Ratehub.ca.

High interest savings account (HISA) ETFs are more flexible than GICs. They hold savings deposits of the big banks, offer high yields, and are liquid. Unlike GICs, HISA ETFs are not guaranteed or covered by CDIC insurance, though they are still a safe way to earn high interest given that the underlying assets are held by the big banks. There are many to choose from. The largest is the Horizons Cash Maximizer ETF (TSX: HSAV) which has $2.2 billion in assets and is currently yielding 5.3%.

So, there you have it. As we enter 2024, there are many options for earning 5% or more in your TFSA, with minimal risk.

This is an edited version of an article that appeared in the Income Investor on Jan 12, 2023.  For information on how to reprint this article please view this page.