The Best Dividend Stocks for Your TFSA in September 2023 – Loans for Stock in Canada

For many beginner investors, their strategy within their Tax-Free Savings Account (TFSA) is to purchase high-risk, high-reward stocks to create significant five or 10-bagger returns over the short term and collect the profits tax-free. They tend to do this with a TFSA over their RRSPs (Registered Retirement Savings Plan) primarily because with an RRSP, deposits will be taxed when you withdraw them in retirement.

However, this is the wrong way to go about it. Long-term, the TFSA is an investment account best used to build a portfolio of strong Canadian companies or ETFs capable of growing via capital appreciation and paying their investors dividends.

Chasing high-risk stocks can lead to Canadians permanently losing TFSA room. If you’re actively trading, it can also put you in the Canada Revenue Agency’s (CRA) crosshairs. If you invest your $6000 in TFSA contribution room in a high-risk stock and it goes to $0, you don’t get that contribution room back. 

I’ve known investors who have lost over $30,000 in TFSA room chasing high-risk micro-cap companies. And if you manage to make money but are deemed actively trading by the CRA, you may be hit with a tax penalty.

In this article, I will highlight 3 Canadian dividend stocks here in Canada that are generating strong cash flow, offer high dividend yields, and have safe dividend payouts when it comes to a percentage of their cash flows.

These may not be the flashiest of stocks on the TSX. However, it’s essential to understand that the majority of the time, strong cash flow generation beats out flash. Most of the stocks below took a back seat to many unprofitable high-flying companies in 2020 and the beginning half of 2021. However, they made a significant resurgence once the market came to its senses. In this market drawdown, they’ve proven invaluable holdings to many Canadians.

The best Canadian dividend stocks for your TFSA in 2023

Fortis (TSE:FTS)Canadian Natural Resources (TSE:CNQ)BCE (TSE:BCE)

Fortis (TSX:FTS)

As a regulated utility, Fortis owns the poles, the lines, the meter box, and the means of power generation.

The company then works with the municipality to not only come to a rate that guarantees a profit for the company but is also beneficial to the consumer.

Fortis owns all of these assets, making it virtually impossible for another competitor to step in and supply power to consumers. And this is how 99% of Fortis’s earnings are generated.

With 49 consecutive years of dividend increases, this makes it a Canadian Dividend Aristocrat and a year shy of becoming a Dividend King, which is 50 straight years of dividend increases.

Not only is it reliable with its dividend growth, but it is also reliable with the rate at which it grows the dividend. The company aims to keep its dividend payout ratio in the 70% range. It aims to increase the dividend by mid-single digits. With a 5-year dividend growth rate of just shy of 7%, it has done just that. Simply put, it has been one of the top Canadian dividend stocks to own for a long time.

Whether you have decades of experience or are just learning how to buy stocks, we should aim to achieve the highest possible total returns from our investments. Fortis is no slouch in this regard, either. It has provided many Canadians with solid capital gains, with double-digit annualized returns over the last decade.

It has struggled as of late in the rising rate environment, primarily because options like GICs and bonds now offer attractive yields. When this happens, the premium in terms of investment income needs to be higher to justify paying for equity over a guaranteed investment.

However, all this has done has made an outstanding company even cheaper. In turbulent times, owning a best-in-class utility with consistent earnings will reduce a lot of stress.

Expect mid to high single-digit growth from Fortis in terms of earnings and revenue, and expect to pay a premium in terms of overall valuation due to the reliability of the company’s profits. These are two things that Fortis has known for a long time. Often trading at a 20x or greater multiple in terms of price to earnings, the stock is hardly ever cheap.

But as the saying goes from one of the most legendary investors of all time Warren Buffett,

It’s better to pay a good price for a wonderful company than a wonderful price for a good company.

Canadian Natural Resources (TSX:CNQ)

If we go back over the last decade, you’ll be hard-pressed to find an oil stock that has performed as well as Canadian Natural Resources.

And that is primarily because it is one of the most efficient companies in the industry, with rock bottom break-even WTI prices and exceptional management.

These two factors not only allowed the company to maintain the dividend but raise the dividend amid the pandemic while others in the industry were slashing dividends at a record pace. That’s right, despite an absolute collapse in demand for crude oil and natural gas, Canadian Natural rewarded investors with a dividend raise in 2021.

This is precisely why the company’s share price also held up admiringly well during the pandemic. Don’t get me wrong, it still plummeted. But not nearly as much as other senior producers and not nearly as much as most junior operators.

The company maintained positive cash flow in 2020, with free cash flow above $2.2B. In this forward-looking environment, if WTI can maintain $70+ a barrel, the company’s cash flow generation could, without question, skyrocket.

The company has stated that once its debt gets below $8B, it will return 100% of free cash flow to shareholders via special dividends and share buybacks. Considering debt levels currently sit at $11B, it won’t take too long for this to happen.

This makes Canadian Natural the perfect option for a TFSA investment. Most of the exceptional value in share price is likely gone, but don’t let the fact you’ve missed the “home run” opportunity with Canadian Natural deter you from checking the company out.

Most major oil companies are likely to return cash flows to investors through a dividend and buybacks. This is because many investors understand the cyclical nature of the business and would much rather the companies give cash flows back to shareholders rather than invest in new projects.

With Canadian Natural’s objective to return 100% of FCF, investors should be rewarded.
So although it currently yields in the mid 4% range, it is highly likely that Canadian Natural will continue its multi-decade dividend growth streak and reward investors with some large increases in their passive income stream over the next while, and likely even some special dividends.
Is it a long-term hold?

Most cyclical options aren’t, but Canadian Natural is so good at what it does. It is one I’d consider holding long-term.

BCE (TSX:BCE)

These factors make it an outstanding option for investing in your TFSA.

With a market cap near $57B, the company is not only the largest telecom in Canada but one of the largest enterprises in Canada. It provides Canadians with mobile services, television, internet, and more.

While Rogers Communications is more prominent in eastern Canada and Telus in western Canada, BCE is more of a countrywide brand, arguably one of the strongest and most well-known behind Royal Bank of Canada.

The telecom industry often offers high yields, and BCE is no exception. It’s the highest yielding in the sector, typically offering a mid-6 % yield. Not only does it provide a juicy dividend yield, but it has a 14-year dividend growth streak as well.

Fourteen years may seem like a short dividend streak for a company like BCE. This is due to an interruption caused by a previously impending purchase by the Ontario Teacher’s plan that ultimately fell through. If the deal hadn’t fallen through BCE’s growth streak would likely be sitting at 20+ years.

Many investors are mainly concerned with high dividend payout ratios for telecom companies. However, it’s important to note that many have taken advantage of record low-interest rates to expand and develop infrastructure, particularly 5G networks.

This can make short-term earnings and free cash flow payout ratios seem abnormally high, and BCE is no exception. With a cash payout ratio over 100%, this company’s dividend looks to be at risk. However, once interest rates rise, the company could ease off CAPEX, reducing its payout ratio.

Overall, BCE is an excellent option for your Tax Free Savings Account and arguably one of Canada’s very few “buy and hold forever” companies.