What Kind of Stocks Should You Hold in a TFSA?

After gaining investing experience, investors should invest tax-free in a TFSA by holding stocks such as Canadian National Railway Company (TSX:CNR)(NYSE:CNI), Enbridge Inc. (TSX:ENB)(NYSE:ENB), and Canadian Apartment Properties REIT (TSX:CAR.UN).

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It seems the conversation of investing in a tax-free savings account (TFSA) becomes quieter and quieter as the months go by in a year, and the conversation is most vibrant at the start of the year. Saving and investing should be a consistent act, so I’m bringing it up again.

By investing instead of just saving, you’re looking for higher returns that come with higher risk. Before thinking about what stocks to buy and hold in a TFSA, I think it’s essential that you have real-world experience in holding stocks in a non-registered account. This is because you don’t yet know how you would react to the different news and events that are thrown at you, good or bad.

I emphasize that it’s essential to have investing experience under your belt before holding stocks in a TFSA because I had first-hand experience losing money in a TFSA, only to find out later that I could not recover the losses. That’s right. Whatever happens in a TFSA stays in it. There’s no tax-reporting needed for a gain or a loss, which also means you can’t write off your capital losses like you could in a non-registered account.

And let me tell you, it could take a long time to recover your losses, especially in a TFSA. Okay, enough of that. Here are the different types of stocks you should consider holding in a TFSA.

Real estate investment trusts

REITs typically own and operate hundreds of properties diversified geographically. If you’re looking for rental income without having to manage or maintain the properties or hiring someone to do it for you, you should consider REITs.

A REIT’s distributions is made up of different components, not eligible dividends, so income received from them are more cumbersome to report taxes on than Canadian eligible dividends that you would receive from, say, Royal Bank of Canada.

There are lots of quality REITs to choose from. Canadian Apartment Properties REIT (TSX:CAR.UN) is a residential REIT that yields 4.4% and its funds from operations are expected to grow around 4% per year. So, its estimated return is 8.4% per year.

The highest-quality Canadian REIT has got to be Canadian REIT (TSX:REF.UN). It is a diversified REIT with retail, office, and industrial properties. It is a conservatively run REIT with a highly sustainable yield of 4.2% since its payout ratio is only about 60%.

Growth stocks

I don’t mean the high-flying speculative growth stocks here, but the dividend-growth stocks that are growing earnings at a double-digit rate on a compound-annual-growth-rate basis.

They include Canadian National Railway Company (TSX:CNR)(NYSE:CNI), which pays a yield of 1.5%, and Enbridge Inc. (TSX:ENB)(NYSE:ENB), which pays a yield of 3.4%.

All three companies have paid dividends for at least 19 years in a row, indicating their businesses are sustainable and profitable through up and down economic cycles. If they dip to lower prices, it’s just a gift from the market for Foolish investors to buy more shares.

Lately, Enbridge is experiencing a dip and is ripe for buying now. Canadian National Railway is recovering from a dip, and it’s not a bad time to buy some shares.

In conclusion

I emphasized quality companies in this article because again, you can’t report losses in a TFSA. In summary, in a TFSA, Foolish investors should consider holding REITs and dividend-growth stocks.

However, if you have lots of room in a TFSA, it makes sense to hold all of the above stocks in a TFSA to avoid all taxes legally. Of course, you should only do so after you gain real-life experience by investing using a non-registered account.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Canadian National Railway, CDN REAL ESTATE UN, Enbridge, Inc. (USA), and Royal Bank of Canada (USA). David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.

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