Holding blue-chip, dividend-paying stocks in a TFSA (Tax-Free Savings Account) is among the best ways to create a tax-free source of passive income. It’s essential to identify quality stocks with strong balance sheets, predictable cash flows, and widening profit margins that have survived multiple economic cycles. Moreover, the dividend yields of companies should be attractive, with payouts increasing every year.

Two such blue-chip TSX stocks include Telus (TSX:T) and Toronto-Dominion Bank (TSX:TD). Let’s see which is a better buy for your TFSA right now.

The bull case for TD Bank stock

Among the largest banks in North America, TD is the sixth-largest bank by total assets. With $1.92 trillion in assets and $1.18 trillion in deposits, TD Bank’s net income in the last four quarters is close to $16 billion.

TD Bank ended fiscal second quarter (Q2) of 2023 with a common equity tier-one (CET1) capital ratio of 15.3%, the second highest among all banks in North America. The CET1 ratio measures the ability of a bank to withstand macroeconomic pressures, and a higher ratio is favourable.

Despite its massive size, TD Bank increased sales by 10% year over year to $12.36 billion in fiscal Q2 (ended in April). The company attributed top-line growth to margin growth in personal and commercial banking businesses as well as higher advisory fees, equity commissions, and lending revenue.

However, its provision for credit losses, or PCL, rose $599 million year over year, dragging net income lower by 12% to $3.35 billion.

In the last five years, TD Bank increased its net earnings from $10.5 billion in fiscal 2017 to $17.4 billion in fiscal 2022. Due to its consistent earnings growth, TD Bank pays shareholders a tasty dividend yield of 4.9%.

Its dividend payouts have increased from $0.22 per share in 1995 to $3.84 per share in 2023, indicating an annual growth rate of 11%. With a payout ratio of less than 50%, TD Bank has enough room to keep increasing dividends once the macro situation improves.

Priced at 9.5 times forward earnings, TD stock is very cheap and trades at a discount of 18% to consensus price target estimates.

The bull case for Telus stock

A Canada-based telecom giant, Telus is valued at a market cap of $37 billion. It pays shareholders a dividend yield of 5.75%, and these payouts have risen at an annual rate of 13% in the last 20 years. Its operating revenues in Q1 increased by 16% year over year to $5 billion, driven by growth in its two business segments, including Telus Technology and Telus International.

Telus Technology’s uptick was on the back of higher health services revenue, which, in turn, was attributed to the acquisition of LifeWorks in September 2022. Further, higher mobile network sales and subscriber growth resulted in steady top-line growth.

Priced at 24 times forward earnings, Telus stock trades at a premium, given adjusted earnings are forecast to rise by 7.6% annually in the next five years.

Analysts remain bullish and expect Telus stock to surge 20% in the next 12 months.

The Foolish takeaway

Both TD Bank and Telus are quality companies with an attractive and sustainable payout ratio. Income-seeking TFSA investors should ideally diversify their holdings and buy shares of both Canadian heavyweights.

But if I need to choose a winner, TD Bank’s lower valuation makes it a better buy right now.