For Canadian investors, the Tax-Free Savings Account (TFSA) is often the best place to hold dividend stocks. Eligible investments can generate dividends and capital gains completely tax-free, making it an excellent wealth-building tool. However, once you’ve maxed out your TFSA, where should you invest next to minimize taxes and maximize long-term returns?
The answer depends on your financial goals. For eligible first-time homebuyers, the First Home Savings Account (FHSA) could be the next best choice. Meanwhile, parents saving for their children’s education should consider the Registered Education Savings Plan (RESP).
Source: Getty Images
FHSA or RESP: Which account offers better tax advantages?
The FHSA combines some of the best features of a TFSA and an RRSP. Contributions are tax-deductible, reducing your taxable income, while qualifying withdrawals to purchase a first home are entirely tax-free. Eligible Canadians can contribute up to $8,000 annually, subject to a lifetime contribution limit of $40,000. For prospective homeowners, this creates an excellent opportunity to invest in dividend stocks while enjoying significant tax advantages.
If buying a home isn’t on your financial horizon but you have children, an RESP deserves serious consideration. This account helps families save for post-secondary education, including university, college, trade schools, and apprenticeships.
One of its biggest advantages is the Canada Education Savings Grant (CESG). The federal government matches 20% of eligible annual contributions, up to $500 annually and $7,200 over a child’s lifetime. Contributing $2,500 annually can unlock the full annual grant. Investments grow tax-free inside the account, and qualifying educational withdrawals are generally taxed in the student’s hands, often resulting in little or no tax.
RESP contributions are limited to a lifetime maximum of $50,000 per beneficiary, although there is no annual contribution limit.
One dividend stock to consider: Sun Life
Once you’ve chosen the appropriate registered account, the next step is finding quality dividend stocks. For investors with at least a five-year investment horizon, Sun Life Financial (TSX: SLF) could be worth considering, particularly during meaningful market corrections.
Sun Life is an established Canadian financial services company with a track record of rewarding shareholders through growing dividends. Over the past decade, the company has achieved an average annual dividend growth rate of about 8.8%, demonstrating its ability to increase shareholder payouts over time.
Sun Life’s current quarterly dividend of $1.00 per share is 8.7% higher year over year. This continued growth suggests management remains confident in the company’s earnings and cash-generation capability.
Equally important, its dividend appears sustainable. The payout ratio is estimated at approximately 48% of adjusted earnings this year, leaving room for future dividend increases while retaining capital to support business growth.
At $104.44 per share at writing, Sun Life offers a dividend yield of approximately 3.8%. With its historical dividend growth and sustainable payout ratio, the stock could appeal to investors seeking a combination of recurring income and long-term price appreciation.
The bottom line
Maxing out your TFSA doesn’t mean your tax-efficient investing opportunities are over. The FHSA and RESP offer valuable additional benefits, depending on whether your priority is purchasing a first home or funding your children’s education.
For eligible investors with a sufficiently long time horizon, holding quality dividend stocks such as Sun Life in these accounts could help build wealth while minimizing taxes. The key is choosing the right account, investing in financially sound companies, and remaining focused on long-term returns.