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Why This Is the Biggest Holding in My TFSA

It’s great to invest in Tax-Free Savings Accounts (TFSAs) because what’s earned inside is tax-free. Although interest income is taxed at a higher rate than income in the form of capital gains or dividends in non-registered accounts, over the long term, it makes better sense to hold quality stocks in a TFSA because investors can take on higher risk.

Why? Stocks tend to outperform other types of investments in the long run.

Currently, Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN) is the largest holding in my TFSA. I started building a position in the utility last year.

How has it performed so far?

I bought Algonquin for its above-average yield and growing dividend. At the time, it offered a yield of about 5%.

Now, nearly seven months after my first purchase, Algonquin has exceeded my expectations. Not only has it increased its U.S. dollar–denominated dividend per share by 10%, but from my average cost basis, it has also appreciated almost 20%.

Because of the continued strength of the U.S. dollar against the Canadian dollar, despite double-digit growth in the share price, the stock still offers a competitive yield of about 4.6%.

Recent developments

In January, Algonquin successfully acquired Empire, a regulated electric, gas, and water utility serving customers in Missouri, Kansas, Oklahoma, and Arkansas.

Essentially, the acquisition added nearly 39% more customers to Algonquin’s customer base. Algonquin now serves about 780,000 customers, and it has a net capacity of more than 1,400 MW for its roughly 263,000 electric customers.

In January and February, Algonquin had some wind and solar facilities come into service. So, the utility now has over 1,500 MW of renewable power-generating capacity. Of these renewable assets, 88% have long-term power-purchase agreements with a weighted average term of 16 years remaining.

Going forward

Algonquin has competency in wind generation, which makes up roughly 68% of its renewable power-generation portfolio. This year, Algonquin expects to invest $1.2 billion into the business, of which 17.5% will be maintenance capital. The capital will be used in projects, such as expanding its wind power-generation capacity and “greening” Empire’s power fleet, which originally was 33% coal and 3% wind.

Investor takeaway

Eleven analysts at Thomson Reuters have a 12-month mean price target of $14.20, which indicates the shares are within fair-value range at about $13.70 per share. The most bullish analyst has a 12-month price target of $16 on the stock, which implies that as much as 17% upside is possible.

In the meantime, the shares offer an attractive yield of about 4.6%. As well, the management has guided to grow Algonquin’s dividend per share by 10% per year through 2021. This growth rate is above average in the stable utility space.

Today, Algonquin is still a reasonable investment that can deliver annualized returns of about 14% for the next few years. Any dips should be viewed as buying opportunities.

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Fool contributor Kay Ng owns shares of ALGONQUIN POWER AND UTILITIES CORP.

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