Once in a while, Canadian investors find themselves with some extra cash to invest.
The funds might be the result of a bonus at work, a repositioning of the portfolio, or the sale of an old fishing boat that has been parked in the back yard for the past five years.
Regardless of the source, one popular way to invest the funds is to buy dividend stocks inside a TFSA.
The TFSA is attractive because it protects all income and capital gains from the taxman. This means the full value of dividends can be reinvested, and, when the time comes to sell, all of the appreciation in the share price goes straight into your pocket.
Let’s take a look at Royal Bank of Canada (TSX:RY)(NYSE:RY) and Fortis Inc. (TSX:FTS)(NYSE:FTS) to see why they might be interesting picks.
Royal Bank
Royal Bank generated just under $10 billion in profits last year and is on track to blow through the milestone in 2016.
The strong results can be attributed to the company’s balanced revenue stream.
Royal Bank gets a significant portion of its earnings from the Canadian personal and commercial operations, but it also has large wealth management, capital markets, and insurance businesses that contribute to the mix.
This is important because a weak quarter in one group is often offset by strength in another segment.
With the Canadian economy facing some headwinds, Royal Bank is now turning to the United States to help drive growth. The company recently purchased City National, a California-based commercial and private bank that caters to high-net-worth clients. The US$5 billion deal gives Royal Bank a solid platform to expand its reach in the segment, and investors could see further deals down the road.
Royal Bank pays a quarterly dividend of $0.81 per share for a yield of 4%.
Fortis
Fortis is a utility company with natural gas distribution, electricity generation, and transmission businesses. The company has grown significantly over the years through strategic acquisitions, and that trend continues.
Fortis just closed its US$11.3 billion purchase of ITC Holdings Corp., which is the largest independent transmission company in the United States. The market initially reacted negatively to the news as analysts worried Fortis might be taking on too much debt.
To protect its credit rating, Fortis agreed to sell a 20% stake in ITC to a sovereign wealth fund. The move helped calm investor fears, and the stock has recovered its initial losses.
The company gets 94% of its revenue from regulated assets, meaning cash flow should be predictable and reliable. This is important for dividend investors who are looking for consistent and safe payouts.
Fortis has raised its dividend every year for more than four decades, and management plans to increase the payout by at least 6% per year through 2021.
The current dividend offers a yield of 3.7%.
Is one a better bet?
Both stocks are attractive TFSA picks for long-term investors.
If you simply want the highest yield, go with Royal Bank as your first pick. Investors who prefer a more conservative bet should probably choose Fortis.
