Canadian pensioners are searching for ways to get more income to compensate for the steady increase in the cost of living. One popular strategy involves holding top TSX dividend-growth stocks inside a self-directed Tax-Free Savings Account (TFSA).

Benefits of dividend growth

Stocks that give investors a raise every year are attractive for helping retirees increase their income. It can be a form of built-in inflation protection for your investments, and top dividend-growth stocks typically deliver long-term capital gains.

Fortis

Fortis (TSX:FTS) is a good example of a top TSX dividend-growth stock. The board has increased the dividend annually for 51 consecutive years.

Regular dividend growth not only provides more income but also acts as a support mechanism for the share price during times of market volatility. Over time, the share price tends to drift higher, providing investors with some decent total returns on the investment that can be monetized if the invested funds are required.

Fortis grows through a combination of strategic acquisitions and development projects. The company hasn't made a major purchase for several years, but that could change as interest rates fall.

For the moment, Fortis is driving growth through its $26 billion capital program. The investments are expected to raise the rate base from $38.8 billion to $53 billion over five years through 2029. As the new assets are completed and go into commercial service, the company expects cash flow to grow enough to support planned annual dividend increases of 4% to 6%. This is good guidance in an uncertain economic outlook heading into 2025.

Fortis gets most of its revenue from rate-regulated assets, including power generation, natural gas distribution, and electricity transmission businesses. These generate reliable and predictable cash flow in all economic conditions, so Fortis should be a good stock to own during a recession.

At the time of writing, FTS stock provides a dividend yield of 4%.

Risks

Fortis saw its share price decline from $65 in 2022 to $50 in 2023. The pullback occurred as the Bank of Canada and the U.S. Federal Reserve aggressively raised interest rates. Fortis uses debt to fund part of its capital program. The jump in borrowing costs threatened to eat into cash that could be used to pay distributions.

Fortis has recovered most of the losses and currently trades near $61.30 per share. The rebound was driven by the end of rate hikes in the United States and Canada and the rate cuts that occurred over the past several months.

Inflation in the U.S. is rising again. This could force the central bank to put additional rate cuts on hold. If inflation spikes in 2025, rate hikes could be necessary to get it back under control. In that scenario, Fortis and other utility stocks could face new headwinds.

Dividend stocks carry risk. The share price can fall below the purchase price, and dividends can be cut if a company gets into financial trouble. This is unlikely to happen with Fortis, but it is not impossible.

The bottom line on top stocks for passive income

Fortis pays an attractive dividend that should continue to grow. If you have some cash to put to work in a TFSA focused on passive income, this stock deserves to be on your radar.