Retirees and other income investors are using their self-directed Tax-Free Savings Account (TFSA) to build portfolios of dividend stocks and guaranteed investment certificates (GICs) to generate steady tax-free passive income that can complement pensions and other earnings.
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TFSA benefits
Interest, dividends, and capital gains earned inside a TFSA are not taxed and can be either fully reinvested or removed as tax-free income. This is particularly helpful for people who are in a high marginal tax bracket. It also benefits retirees who collect Old Age Security (OAS) pensions. The government implements an OAS pension recovery tax when net world income tops a minimum threshold, so retirees should try to max out their TFSA contribution space before holding income-generating investments in taxable investment accounts.
The TFSA limit is $7,000 in 2026. This brings the cumulative maximum TFSA contribution space to $109,000 per person for everyone who has qualified since the launch of the TFSA in 2009.
GICs or Dividend Stocks?
GIC rates briefly hit 6% in late 2003 at the peak of the Bank of Canada’s interest rate hikes, which were put in place to fight inflation. Cuts to rates in 2024 and 2025 led to lower yields in the bond market and subsequent drops in rates offered by financial institutions on GICs. At the time of writing, investors can still get non-cashable GICs that pay more than 3% for terms of two to five years. This is comfortably above the rate of inflation, so it makes sense to consider holding some GICs to reduce portfolio risk.
Dividend stocks can provide yields that are higher than GIC rates, but the extra return comes with some risk. Share prices can fall below the purchase price and dividends sometimes get cut if a company runs into cash flow issues. That being said, companies that have good track records of delivering steady dividend growth are worth considering for an income portfolio.
Enbridge (TSX:ENB) has increased its dividend in each of the past 31 years. The energy infrastructure giant continues to grow through acquisitions and internal projects.
The current $39 billion development program is expected to drive annual growth in distributable cash flow of about 5% over the next few years. That should enable ongoing dividend increases. Investors who buy ENB stock at the current level can pick up a dividend yield of 5.3%.
Fortis (TSX:FTS) is another good example of a top TSX dividend-growth stock. The board has increased the distribution annually for more than five decades. Fortis is working on a $28.8 billion capital program that will raise the rate base by an average of 7% annually over the next five years. As the new assets are completed and go into service the boost to cash flow should support the planned annual dividend hikes of 4% to 6% through 2030.
Fortis provides a dividend yield of 3.3 % at the time of writing. That’s lower than the yield on other stocks, but the return on the initial investment rises with each dividend increase.
The bottom line
Investors can quite easily put together a diversified portfolio of GICs and dividend stocks to get an average yield of 4% today. On a TFSA of $109,000 this would generate $4,360 in annual tax-free passive income.