How to Generate Good Returns No Matter What the Market Does

Stocks have different characteristics. Some might have slow growth but pay a high dividend yield. Others might have high growth and pay little to no dividend. Then there are those companies that exhibit moderate growth and offer moderate dividend yields.

In different markets, one type will outperform another. That’s why some investors choose to maintain a balanced stock portfolio made up of these kinds of stocks.

How might you go about building a balanced stock portfolio for your TFSA?

High yield

A high-dividend-yield stock should have a rock-solid dividend because most of its returns come from the dividend. These stocks tend to experience slower growth.

For example, at $8.14 per unit, Dream Industrial Real Estate Invest Trst (TSX:DIR.UN) yields 8.6%. Its adjusted funds from operations payout ratio is under 86%, which is on the conservative side for a real estate investment trust (REIT) with a high distribution yield.

Dream Industrial collects rent from 1,310 tenants across 219 industrial properties. Its committed occupancy is high at 94.7%. Its Albertan-property committed occupancy is surprisingly high at 97.5%.

With a diversified portfolio of many tenants and a strongly committed occupancy, Dream Industrial’s 8.6% yield should remain safe.

REITs pay out distributions that are like dividends but are taxed differently. If you hold REITs in TFSAs, you won’t have to worry about the tax-reporting hassle and can earn tax-free, monthly income.

High growth

Since Facebook Inc. (NASDAQ:FB) doesn’t pay a dividend, it’s all right to hold it in a TFSA. The tech giant is expected to grow earnings by more than 30% in the medium term! That’s why it trades at a phenomenal multiple of about 43 at US$118 per share today.

If it’s able to achieve this amazing growth, it could trade at US$180 per share in two years for a 50% gain. By holding it in a TFSA, you won’t need to pay capital gains tax when you sell.

Moderate yield and moderate growth

Companies that grow 5-7% per year in the medium term fall into this category. By investing in these companies, a big portion of your total returns is from the dividend and the rest is from capital gains.

An example is Bank of Nova Scotia (TSX:BNS)(NYSE:BNS). At $62, it yields 4.6%. And it’s expected to grow its earnings by 5-7% in the medium term. So, investors can expect approximate total returns of 9.6-11.6% from it.

Putting it all together

In a bear market, investors can get a solid income from the likes of Dream Industrial and Bank of Nova Scotia. However, if the economy is doing well, growth stocks like Facebook would likely outperform.

By building a portfolio in your TFSA with a balance of high yield, high growth, and moderate yield and moderate growth, investors should be able to generate decent returns no matter what the market is doing.

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Fool contributor Kay Ng owns shares of Facebook and Bank of Nova Scotia (USA). David Gardner owns shares of Facebook. Tom Gardner owns shares of Facebook. The Motley Fool owns shares of Facebook.

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