Your Tax-Free Savings Account (TFSA) is a powerful tool for building wealth, particularly when it comes to housing income-generating assets. One of the key advantages of a TFSA is that any dividends you receive are entirely tax-free. This feature makes the TFSA an ideal place to create a secondary stream of passive income, whether you’re reinvesting dividends during your accumulation phase or withdrawing them for income in retirement.
In this guide, I’ll introduce you to two Canadian exchange-traded funds (ETFs) that offer higher-than-average yields and have historically delivered strong total returns. These ETFs are well-suited for long-term holdings in your TFSA.
A Canadian Dividend ETF
First on the list is the Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX). This ETF focuses on the higher-yielding segments of the Canadian stock market, primarily targeting the financial and energy sectors. With 56 holdings, VDY is designed to capture the performance of stocks that pay higher-than-average dividends.
What makes VDY particularly attractive for a TFSA is its monthly dividend distribution. Currently, it offers a 12-month trailing yield of 4.6%. This consistent income can be a valuable asset for those looking to generate passive income or reinvest dividends to accelerate portfolio growth.
Another advantage of VDY is its low cost. The ETF has a management expense ratio (MER) of just 0.22%, meaning you’ll pay only $22 annually on a $10,000 investment. This cost-effectiveness, combined with its strong yield, makes VDY a compelling option for TFSA investors.
A Canadian REIT ETF
Real Estate Investment Trusts (REITs) are another smart choice for your TFSA, as they typically offer higher yields. Since REIT income is not taxed as favorably as Canadian dividends, holding REITs in a TFSA allows you to maximize your returns by avoiding taxes on this income.
For those interested in REITs, the Vanguard FTSE Canadian Capped REIT Index ETF (TSX) is an excellent option. This ETF provides exposure to a diversified mix of 15 REITs across various sub-sectors, including retail, residential, industrial, office, diversified holdings, development, and healthcare.
Like VDY, VRE also pays dividends monthly, currently offering a yield of 2.8%. The ETF has a management expense ratio (MER) of 0.39%, which is reasonable given the diversification and income it provides.
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Both VDY and VRE are cost-effective ETFs that offer above-average dividend yields and payout monthly distributions. Holding these ETFs in your TFSA allows you to keep 100% of the dividends you receive, providing an excellent opportunity for generating tax-free passive income. Whether you choose to withdraw these dividends for income or reinvest them to grow your portfolio faster, these ETFs can be valuable long-term holdings in your TFSA.