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Loblaw’s shares are a good fit for a TFSA because of the grocery giant’s defensive nature and attractive valuation. THE CANADIAN PRESS/Nathan Denette

Nathan Denette/The Canadian Press

Investing in Canadian dividend stocks can be a wise strategy to grow investors’ holdings in a tax-free savings account (TFSA) for the many people who remain reluctant about embracing equities within the structure.

Since the TFSA was introduced a decade ago, the cumulative contribution room for TFSA holders who were at least 18 years of age in 2009 is $63,500. Although dividend income and capital gains are free from the Canada Revenue Agency’s clutches when withdrawn from a TFSA, a recent Royal Bank of Canada survey indicates that 42 per cent of holdings in a TFSA are still in cash or in savings accounts that pay paltry interest rates.

As regular dividend payouts can also be comforting during volatile markets, we asked three portfolio managers for their top picks among Canadian dividend-payers for a TFSA:

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Manash Goswami, senior vice-president and portfolio manager, CI First Asset Exchange Traded Funds, a division of CI Investments Inc.

His fund: CI First Asset Active Canadian Dividend ETF (FDV-T)

The pick: Algonquin Power and Utilities Corp. (AQN-T)

Forward annual dividend (and yield): US56 cents a share (4.14 per cent)

This utility stock is ideal for a TFSA because of its high cash-flow and dividend-growth rate, Mr. Goswami says. Oakville, Ont.-based Algonquin gets 70 per cent of its revenue from regulated utilities and the rest from renewable power. The company, which has raised its U.S.-dollar dividends each year since 2009, should grow its cash flow by 10 per cent annually in the next few years, he says. Eighty per cent of its business is in the United States. Algonquin’s shares have rallied strongly this year because it’s seen as a “defensive trade” amid macroeconomic uncertainty, but its stock has just been slowly grinding higher in recent years, he adds. “It also trades at premium valuation [versus Canadian peers] because of its growth rate.” Rising interest rates are a risk,but that’s unlikely “in the next little while.”

The pick: Waste Connections Inc. (WCN-T)

Forward annual dividend and yield: 64 cents a share (0.70 per cent)

This Vaughan, Ont.-based provider of solid waste and recycling services in North America is an appealing investment because it can hold up very well in good and bad economic times, Mr. Goswami says. Waste Connections does business in markets in which it has a monopoly or in secondary markets in which it’s the dominant provider of waste management, he adds. With little competition, it can get good pricing and margins and Mr. Goswami says he and his team “see double-digit dividend growth over the next couple of years.” Waste Connection’s stock stumbled in recent months after rallying earlier this year, but that was likely due to a softer-than-expected second quarter and profit-taking, he says. “It’s not necessarily a cheap stock but it is a very high-quality name that would be good in a TFSA.”

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Steve Bélisle, senior portfolio manager, Manulife Investment Management

His fund: Manulife Fundamental Dividend Fund

The pick: Loblaw Cos. Ltd. (L-T)

Forward annual dividend and yield: $1.26 a share (1.73 per cent)

Loblaw’s shares are a good fit for a TFSA because of the Brampton, Ont.-based grocery giant’s defensive nature and attractive valuation, Mr. Bélisle says. “Groceries are generally more stable and less cyclical than the rest of the market.” Using free cash-flow yield as a valuation measure, Loblaw’s stock is “probably the cheapest consumer staple among the Canadian large-caps,” he says. Loblaw has also diversified into the pharmacy business with its acquisition of Shoppers Drug Mart Corp. and also offers banking services. E-commerce competitors, such as Amazon.com Inc., are a risk, but that’s not a concern in Canada right now, he says. Loblaw’s stock, much like its peers in the consumer staples sector, has been climbing this year. “Our target return for the next 12 months is about $80 a share.”

The pick: CCL Industries Inc. (CCL.B-T)

Forward annual dividend and yield: 68 cents a share (1.28 per cent)

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Toronto-based CCL is a compelling investment because the label-maker and specialty-packing giant is a global leader in most of its industry niches, Mr. Bélisle says. Customers include names such as Diageo PLC, Unilever PLC and Procter & Gamble Co. In recent years, CCL has diversified by acquiring U.S.-based Checkpoint Systems Inc., a maker of anti-theft tags, and Britain-based Innovia Group LLC, a maker of a polymer bank notes and specialty films. Using a free cash-flow yield as a valuation metric, CCL’s shares are trading cheaply, he notes. The stock has struggled recently on concerns about the oil-price spike as this commodity is a raw material for plastics, but “it’s a very transient issue because they will adjust their pricing,” he says. CCL’s stock could reach about $70 a share over the next 12 months, he suggests.

Robert Lauzon, managing director and deputy chief investment officer, Middlefield Capital Corp.

His fund: Middlefield Canadian Dividend Growers Class

The pick: Enbridge Inc. (ENB-T)

Forward annual dividend and yield: $2.95 a share (6.23 per cent)

Shares of the Calgary-based North American pipeline operator are suitable for a TFSA because it has a fairly low-risk utility business model, Mr. Lauzon says. Enbridge gets 98 per cent of its cash flow from contracts, he adds. It’s also developing projects over the next five years that will provide “continued growth of cash flow and earnings.” Enbridge’s shares could provide about a 10-per-cent total return annually for the next couple of years from dividends and capital appreciation, he says. Investors can also use their payouts to buy more shares through a dividend reinvestment plan that the company offers. Enbridge faces a headwind from regulatory challenges to replace its aging Line 3 oil pipeline through Minnesota, but that could be resolved sometime next year, he suggests. That resolution could send the stock to the low $50-a-share range, he says.

The pick: Westshore Terminals Investment Corp. (WTE-T)

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Forward annual dividend and yield: 64 cents a share (3.13 per cent)

Shares of this Vancouver-based coal-export terminal operator are valued attractively for investors who are willing to own the stock for five to 10 years, Mr. Lauzon says. As Westshore has spent money to expand its facility by 10 per cent, its earnings should improve, which will allow the firm to hike its dividend, he adds. Westshore’s stock has struggled on concerns about the potential loss of customers. U.S.-based coal operator Cloud Peak Energy Inc. filed for bankruptcy in May, but Navajo Transitional Energy Co. struck a deal recently to buy its mines. Vancouver-based Teck Resources Ltd. threatened to move much of its coal volume to other facilities when its contract ends in 2021, but “we think it is a negotiating tactic,” he says. Westshore’s stock could get to the $23- to $27-a-share range within eight months, he adds.

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