A new year is upon us, which means it’s time for us finance nerds to contribute to our TFSAs.
Things are a little different this year. Instead of being able to contribute $5,500, the limit has been increased to $6,000. This is great news. Sure, it might not seem like much today, but it’ll make a huge difference over a few decades.
The only thing left for an investor to decide is what stocks to buy with their contribution. I have three different ideas, with each pick focusing on a different investing style. One is a growth stock, one a value play, and the other has one of the best dividend yields out there.
Let’s take a closer look.
Growth
Many investors are skeptical Dollarama (TSX:DOL) can maintain the fantastic growth it has delivered since its 2009 IPO. I believe the company still has ample opportunities to expand.
Let’s begin here in Canada. Dollarama has approximately 1,200 stores today. Analysts believe there’s room for another 500 or so before growth is impeded. I believe growth potential is even better than that. Remember, there are some 30,000 dollar stores in the U.S., an economy approximately 10 times bigger than Canada’s. Thus, I believe there’s long-term potential for Dollarama to hit 3,000 or even 4,000 stores in Canada.
Then there are growth opportunities abroad. Dollarama has an option to buy a 50% stake in Dollar City, which has expanded to 150 stores spread out between Columbia, El Salvador, and Guatemala. Next up are plans to enter Peru and Ecuador. There are approximately 120 million people living in those five countries. Dollar City could eventually surpass the Canadian operations.
Finally, Dollarama has one big advantage over other retailers. It can pick and choose what it stocks since the average store only has about 4,000 items. A typical big-box store might have 50,000 different items. This ability to be selective ensures healthy gross margins; the company has been able to maintain 40% gross margins versus 20-25% for other retailers.
Value
Sure, Laurentian Bank (TSX:LB) has a few warts, but value investors shouldn’t be scared. The stock is so cheap, you’re being well compensated for these issues.
Let’s start with the price-to-earnings (P/E) ratio. Laurentian earned $5.10 per share in 2018. Shares currently trade hands at $38.57. That gives the stock a P/E ratio of just 7.6. Analysts don’t believe earnings will collapse either; they’re expected to increase slightly to $5.20 per share in 2019.
Laurentian also trades comfortably under book value, and it sports a 6.8% dividend yield. None of Canada’s major banks come close on either of those ratios. Laurentian is the cheapest bank in Canada. By far.
The company’s issues aren’t that bad, either. It wants to close more branches but is facing resistance from its unionized workforce. And it had a bit of a mortgage scandal when it was forced to buy back some loans that were sold to a third party. Neither of these should matter in five years, which makes Laurentian a great buy today.
Income
It’s challenging to find stocks yielding more than 7% that have payouts investors can count on. Dream Industrial REIT (TSX:DIR.UN) is one such company.
Dream Industrial is one of Canada’s largest owners of industrial space, and it has successfully expanded into the United States. Combined, Dream owns 20 million square feet of real estate in both countries, with 17% of rents coming from south of the border.
Dream has three big potential expansion opportunities. The first is e-commerce. Retailers will invest less into retail space going forward, choosing instead to focus on online sales. This translates into more warehouse space. Dream also has an opportunity to rent warehouse space to marijuana growers. Finally, it can continue growing south of the border — a market that provides limitless opportunity.
While waiting for these growth plans to happen, investors can be happy collecting a 7.4% yield. Don’t worry about a potential dividend cut either; Dream’s payout ratio is around the 80% level. That’s quite sustainable for a REIT.
The bottom line
January is the most exciting time of the year for TFSA investors. It’s time to put your capital to work. No matter what type of investor you are, this January offers some compelling bargains.
