The Best Dividend Stocks for Your TFSA in May 2022

Posted on May 17, 2022 by Dylan Callaghan

For many beginner investors, their strategy within their Tax-Free Savings Account (TFSA) is to purchase high-risk, high-reward stocks in an attempt to create large 5 or 10-bagger returns over the short term and collect the profits tax-free.

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

Chasing high-risk stocks can lead to Canadians permanently losing TFSA room. If you invest your $6000 in contribution room in a high-risk stock and it goes to $0, you don't get that contribution room back. I've personally known investors who have lost over $30,000 in TFSA room chasing high-risk micro-cap companies.

In this article, I'm going to highlight 3 Canadian dividend stocks here in Canada that are generating strong cash flow, offer high dividend yields, and 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, I think it's important 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, but made a large resurgence once the market came to its senses. In this current market drawdown, they've proven to be invaluable holdings to many Canadians.

3 of the best Canadian dividend stocks for your TFSA in 2022

Fortis (TSX:FTS)

Fortis dividend

Arguably one of the most reliable companies in North America, Fortis (TSE:FTS) is one of the best performing regulated utilities of the last decade.

In order to understand how Fortis can generate such consistent cash flow over the span of multiple decades, you must first learn what a regulated utility is. The answer is relatively simple.

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 all but guarantees a profit for the company, but is beneficial to the consumer as well.

The fact Fortis owns all of these assets makes 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 48 consecutive years of dividend increases, this not only makes it a Canadian Dividend Aristocrat, but also 2 years 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, and aims to grow 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 be aiming to achieve the highest possible total returns from our investments. Fortis is no slouch in this regard either. It has provided many Canadians with strong capital gains over the years, with double-digit annualized returns over the last decade.

Expect mid to high single-digit growth from Fortis in terms of both earnings and revenue, and expect to pay a premium in terms of overall valuation due to the reliability of the company's earnings. These are two things that Fortis has been 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)

CNRL stock

If you've been a Stocktrades follower for a reasonable amount of time, you probably know that we really don't suggest investing in cyclical options for the long term. However, as one of the best oil producers on the planet, Canadian Natural Resources (TSE:CNQ) is certainly an exception to the rule. It is simply one of the best dividend stocks in Canada, and has been for quite some time.

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 due to the fact that 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 in the midst of the pandemic, while others in the industry were slashing dividends at a record pace. That's right, despite an absolute collapse in the demand for crude oil and natural gas, Canadian Natural rewarded investors with a raise of the dividend.

This is precisely why the company's share price held up admiringly well during the pandemic as well. 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 still maintained positive cash flow in 2020, with free cash flow in excess of $2.2B, and in this forward-looking environment, if WTI can maintain $70+ a barrel, the company's cash flow generation could, without question, skyrocket. We have witnessed this recently with the company generating more free cash flow in the third quarter of 2021 than it did in Fiscal 2020 and 2019 combined.

This type of cash flow generation makes Canadian Natural the perfect option for a TFSA investment. Most of the exceptional value in terms of 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 in the form of a dividend. 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.

So although it yields in the high 3% range right now, 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.

Is it a long-term hold? Not necessarily. Most cyclical options aren't, which make them extremely difficult to profit from in the long term. But, it's certainly one of the best options in the industry for investors looking for exposure for a multi-year hold.

BCE (TSX:BCE)

BCE dividend

If you want to look at how compounding returns work, look no further than a total return chart of BCE (TSE:BCE). If you had invested $10,000 in this company in the mid 1990's, you'd be sitting on a whopping $468,000 right now. Just shy of a 47-bagger.

Is BCE the fastest growing telecom in the country? Not necessarily. Is it one of the most reliable companies in North America with one of the largest economic moats in Canada? Absolutely.

Both of these factors make it an outstanding option for an investment in your TFSA.

With a market cap near $63B, the company is not only the largest telecom in Canada, but one of the largest enterprises in Canada. It provides Canadians with mobile service, 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 well-known in the country behind Royal Bank of Canada.

The telecom industry often offers high yields, and BCE is no exception. In fact, it's the highest yielding in the sector, typically offering a mid 5% yield. Not only does it provide a juicy dividend yield, but it has a 13-year dividend growth streak as well.

13 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. It is very likely if the deal hadn't fallen through BCE's growth streak would be sitting at 20+ years.

Many investors are particularly concerned with high dividend payout ratios when it comes to telecom companies. However, it's important to note that many of them have been taking 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 in excess of 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 is arguably one of the very few "buy and hold forever" companies in Canada.

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post.

Dylan Callaghan

About the author

Dylan is the co-founder of Stocktrades.ca and an avid self-directed investor. He holds a portfolio of Canadian growth and dividend growth stocks, and believes that anyone, regardless of financial status, stands to benefit from investing in the stock market. His ultimate goal with his writing and the continual development of Stocktrades.ca is to create a resource that helps Canadians, and investors from around the world, make more money and retire earlier.