The new year is just around the corner, and investors may be wondering what new holdings they should add to their TFSA with their $5,500 contribution for 2017. If you haven’t already contributed to your TFSA for 2016, then you’d best do so now and make sure you contribute for your 2017 contribution as soon as possible once the new year arrives.
I encourage investors to contribute the full $5,500 in January, so you’re able to take advantage of the power of tax-free compounding as early as possible.
The Trump rally has started to slow down in the month of December, and you may be wondering what is in store for the new year. President-elect Donald Trump is going to strengthen the U.S. economy next year with his corporate tax cuts and deregulatory measures. We can expect better earnings coming from American companies as well as a strengthening U.S. dollar.
What does this mean for Canadians?
The Canadian dollar is expected to nosedive into the 60-cent territory next year, which will be the result of three predicted U.S. rate hikes next year. It’s in the Canadian investors’ best interest to buy Canadian stocks that have a large U.S. exposure, so they can hedge themselves against a falling loonie. For a TFSA account, a Canadian company with a large U.S. exposure and a high, growing dividend would be ideal.
Which company fits this description?
Toronto-Dominion Bank (TSX:TD)(NYSE:TD) has the highest amount of exposure to the U.S. than any of the banks in the Big Five. The company also has a very bountiful dividend yield of 3.3%. There’s no question that the company will be riding the huge tailwinds of Donald Trump’s new policies next year, and the dividend is expected to increase by as much as 20%.
The company is a dividend-growth king and could be one of the biggest winners of 2017. The stock is considerably more expensive than its peers in the Big Five; is there any value to be had after its impressive run last year?
The stock soared nearly 22%; are most of the tailwinds for next year already baked into the stock at current levels? Definitely not. All the Canadian banks rallied last year as part of a recovery for what was a slow 2015. Toronto-Dominion Bank actually reported weak earnings during its last quarterly report, and the stock may be waiting for an earnings beat before soaring into the atmosphere.
The Canadian banking segment was quite weak in the latest earnings report, but the U.S. segment was firing on all cylinders. The U.S. segment enjoyed a 14% year-over-year increase, and this could be just a small glimpse of what’s in store for next year.
What about valuation?
Toronto-Dominion Bank looks pricey when you look at the price-to-earnings multiple, which is currently at 14.35, but this is far from the truth. The stock has always traded at a premium to its peers in the Big Five, and this is because of the fantastic risk-management strategy the company has.
I believe the stock is incredibly undervalued at current levels, and we could see the price-to-earnings multiple drop as next year’s earnings could be one for the record books. If you’re looking for a name to add to your TFSA, then look no further than Toronto-Dominion Bank. If you thought the company delivered fantastic results last year, just wait until next year.
