The Best Dividend Stocks for Your TFSA in April 2024

WRITTEN BY Dylan Callaghan | UPDATED ON: April 8, 2024

Best Dividend Stocks for Your TFSA

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. Stocktrades Ltd will run advertisements on our posts. These advertisements do not represent an endorsement by us.

A lot of novice investors aim to buy volatile yet potentially profitable stocks within their Tax-Free Savings Account (TFSA), in order to create substantial five or 10-time returns in a short period of time. The goal is to gather the earnings without having to pay taxes.

They tend to do this with a TFSA over their RRSPs (Registered Retirement Savings Plan) primarily because, with an RRSP, any withdrawals are subject to taxes.

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

So, let's look at some of the best dividend stocks for your TFSA right now.

The best Canadian dividend stocks for your TFSA

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. Of note is that it is dual-listed and trading on the NYSE and TSX.

To understand how Fortis can generate such consistent cash flow over 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 come to a rate that guarantees a profit for the company and 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 50 consecutive years of dividend increases, Fortis has officially graduated from a Canadian Dividend Aristocrat to a Canadian Dividend King. That's a huge accomplishment, as only one other company in Canada has hit dividend king status—Canadian Utilities.

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 approximately 6%, 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 recently 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)

CNRL stock

Suppose you've been a Stocktrades follower for a reasonable amount of time. In that case, you probably know that we 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 undoubtedly an exception to the rule. It is one of Canada's best dividend stocks 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 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 also raised 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 is a cash flow machine.

The company recently hit leverage targets, and as a result, it will return 100% of its free cash flow to shareholders via special dividends and share buybacks. At today's oil prices, Canadian Natural can easily hit $1B+ in free cash flow each quarter.

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 dividends 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 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 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.

Canadian National Railway (TSX:CNR)

If there is one thing the Canadian markets are known for, it's their sector concentration in big companies. What do I mean by that? In the telecom industry, we have three major players, and the big banks have a stranglehold on the banking markets. 

Well, there is one industry that is even less diversified than those, railways.

In Canada, there is a duopoly between CN Rail and CPKC Rail. Combined, they own approximately 85% of the Canadian transport market. Canadian National Railway (TSX:CNR) is the industry leader and accounts for half of all goods transported in this country. 

Even though rail might seem like an old-school method of transportation, it remains the most critical piece of infrastructure for moving goods across Canada. This is true not only domestically but across North America. 

Canadian National's railway spans Canada from coast to coast and extends through Chicago to the Gulf of Mexico.

In 2023, CN Rail generated clause to $17 billion in revenue by hauling intermodal containers (23% of consolidated revenue), petroleum and chemicals (19%), grain and fertilizers (19%), forest products (12%), metals and minerals (12%), automotive shipments (6%), and coal (6%). 

It operates close to 19,000 miles of track, and CN Rail transports more than 300 million tons of natural resources, manufactured products, and finished goods throughout North America annually. 

The company is a Canadian Dividend Aristocrat with a 28-year dividend growth streak, tied for the 10th-longest dividend growth streak in the country. It has a history of raising the dividend in the double digits and plenty of room for continued growth, given its low payout ratios. 

CN Rail has consistently delivered double-digit returns on invested capital (ROIC) and maintained a strong balance sheet. It also generates close to $4B in free cash flow annually. This behemoth, with a market cap north of $110B, is one of the largest companies in the country. 

There are very few stocks that investors can set and forget. Still, CNR's historical performance and dominant position in a highly regulated market make it one of the few stocks that fit this definition. 

Over the long term, CNR has consistently outperformed the index and has returned more than double the S&P/TSX over the past 10 years. This makes it a perfect stock for investors to hold in a TFSA.

Why you shouldn't chase high returns in your TFSA

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 $6500 in a 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 rooms 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.

Even with the TFSA annual contribution growing to $7,000 in 2024, it still takes too much time to get that precious contribution room back.

Another poor choice is high-fee mutual funds. Yes, funds offer much of the same diversification benefits as ETFs, and they can outperform their underlying index, but ultimately, most end up underperforming because of those fees.

Many investors chose fixed-income instruments for their TFSA contribution room in 2023, buoyed by higher interest rates being offered for high-interest savings accounts (HISAs) or guaranteed investment certificates (GICs).

These TFSA savings accounts don't offer any capital appreciation potential, but they also won't fall if markets are weak either.

Typically, the best rates for GICs or HISAs are found with online banks, such as Tangerine, EQ Bank, or others. You'll find much lower rates at Canada's largest banks, many of which only offer a small amount of interest for their regular savings accounts.

Overall, these three are solid options to start your research

In this article, I highlighted three Canadian dividend stocks that generate strong cash flow, offer high dividend yields, and have safe dividend payouts as a percentage of their cash flows. These boring blue-chip stocks are excellent choices for your TFSA deposits.

These may not be the flashiest stocks on the TSX. However, it's essential to understand that most of the time, strong cash flow generation beats flash.

Most of the stocks in this article 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.

In short, some of the best TFSA investments can also be some of the most boring ones.