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First Brexit… then Trump… Now, it’s time for Pro

Is your portfolio really prepared for what’s coming next?

To help investors like you navigate this historically uncertain — yet high-flying — market and prepare for an inevitable downturn, we’re re-opening our Motley Fool Pro Canada service to a select few new members for a short time.

To discover how Pro Canada could help you to increase your upside potential… reduce your downside risk… and earn paycheque-like income in the process, simply click here — before the small number of spots we have left are all gone!

How to Improve Returns in Your TFSA

Interest you receive is taxed at your marginal tax rate. So, you might have received advice to hold interest-producing investments in your tax-free savings account (TFSA).

However, historically, over the long term, the stock market has generated higher returns than guaranteed investment certificates and bonds.

Specifically, stocks have generally returned 9.8% per year with inflation applied. So, to improve the returns of your TFSA, you should consider investing in stocks.

There are several key points investors should keep in mind:

  • Buying a stock is owning a piece of a business
  • Even the best company should not be bought at any price
  • It’s best to apply your stock-investing success in non-registered accounts to your TFSAs

Buy quality companies

True investors view buying shares in a stock as owning a part of a business. The simplest way to identify quality businesses is locating dividend-growth companies that are profitable in all kinds of business cycles.

These companies’ products and services are needed no matter how the economy is doing. Since they generate a stable, growing cash flow, they are able to reward shareholders with growing dividends.

For example, Fortis Inc. (TSX:FTS) is primarily a regulated utility which has paid a growing dividend for more than 40 years. It consists of nine utilities with about $29 billion of assets that serve 3.2 million electric or gas customers.

Fortis has had success acquiring and integrating utilities. It has announced it will acquire ITC Holdings, which will diversify Fortis’s business and reduce its risk as an investment. The acquisition is expected to close late this year, but it’s still subject to regulatory approvals from multiple parties.

Since Fortis’s payout ratio is 71% of its 2015 earnings and its earnings should continue to grow this year, Fortis’s dividend is reliable. In fact, Fortis is so confident about its growth in the next few years that it targets to hike its dividend by 6% per year on average through 2020.

Valuation

Even though Fortis is a top dividend-growth company, investors shouldn’t pay too much for it. If you do, the business can do well, but the stock can perform poorly.

At $39.80 per share, Fortis trades at 18.6 times its earnings and yields almost 3.8%. The utility is close to fully valued today and has little margin of safety. If it dips to $37.50 per share, investors can grab it for a 4% yield.

Fortis is a great choice for income investors looking for a solid dividend and a stable business.

Previous investing experience

TFSAs are great for earning tax-free dividend income and capital gains. However, if any losses occur in TFSAs, you cannot use it to offset capital gains like you can in non-registered accounts.

So, it’s best to have experience investing in non-registered accounts before applying that success to investing in TFSAs.

Conclusion

By buying quality companies at reasonable to discounted valuations, you can improve your returns in your TFSAs. Remember to test out your strategies in non-registered accounts before applying your success in TFSAs to avoid losses.

Motley Fool issues rare "double down" stock alert

Not to alarm you but you recently missed an important and rare event. Stock Advisor Canada issued a "double down"... and history suggests it pays to listen. Because 10 of the most lucrative "double downs" in one of the Motley Fool's premier services skyrocketed an average of 434%! So, simply click here to discover why Motley Fool "double downs" have some investors rocking with excitement. Five years from now, you'll wish you'd grabbed this stock. Click here to learn more.

Fool contributor Kay Ng owns shares of FORTIS INC.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

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