2 Safe Dividend Stocks for Your TFSA

Want to limit losses and maximize returns in your TFSA? Consider buying Manulife Financial Corp. (TSX:MFC)(NYSE:MFC) and another A-grade company.

| More on:
The Motley Fool

The tax-free savings account (TFSA) is a great place to invest for tax-free returns and income. However, it’s really a double-edged sword. What you earn inside is tax free, but any losses you experience in it can’t be reported to offset gains like you can in a non-registered account.

That’s why it’s essential not to take excessive risk in your TFSA. To prevent losses and to ensure satisfactory long-term returns, investors should consider inexpensive, A-grade companies for TFSAs.

National Bank of Canada (TSX:NA) and Manulife Financial Corp. (TSX:MFC)(NYSE:MFC) are A-grade companies that are priced at reasonable valuations. Additionally, they pay yields of 4% and are perfect for if earning regular income.

National Bank of Canada

At about $45 per share, National Bank yields 4.8% and is fairly valued at a multiple of about 10. It thrived in the financial crisis of 2008 and 2009 by continuing to grow during that period. In its fiscal year 2008, its adjusted earnings per share (EPS) grew 2%. In 2009 its EPS grew 8%.

However, to be conservative, it froze its dividend from 2008 to 2010 but resumed its dividend growth in 2011 when the economy came out of the recession.

The bank has increased its dividend for six consecutive years. National Bank’s dividend is 8% higher than it was a year ago. Its quarterly dividend per share of $0.54 equates to an annual payout of $2.16 per share, which is only 46% of its fiscal 2015 earnings. So, National Bank should be able to continue hiking its dividend.

Most importantly, National Bank is priced reasonably, so investors can consider buying it in a TFSA to get a 4.8%, growing income.

Manulife

At about $19 per share, Manulife yields 3.9% and is priced at a discount of roughly 19% based on its normal historical multiple. Actually, for most of 2014 and a part of 2015, it traded at an even higher multiple of 15, implying it could be discounted by about 32% when it’s fully valued. This means there’s a potential for a capital appreciation of 23-47% from current levels.

In the medium term, Manulife is expected to experience earnings growth of 8-12%. That’s why the company was confident enough to raise its dividend by 8.8% early this year.

Manulife’s quarterly dividend per share is 18.5 cents, which equates to an annual payout of $0.74 per share. And its payout ratio is 44% based on its 2015’s earnings. Manulife has increased its dividend for two consecutive years, which hopefully marks the start of a long dividend-growth streak.

Conclusion

Both National Bank of Canada and Manulife are dividend-growth stocks with S&P credit ratings of A, indicating they have strong balance sheets. Most importantly, the companies are priced at reasonable valuations, which is the main factor for reasonable long-term returns. By buying them in a TFSA, investors can earn tax-free income with a yield of 3.9-4.8%.

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 Manulife Financial (USA ).

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »