TFSA Investors: 2 Stocks to Include and 1 to Avoid

Be conservative with your TFSA by choosing stable stocks, like Algonquin Power Corp. (TSX:AQN)(NYSE:AQN), that will make the most of your contribution room.

| More on:
edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk

Image source: Getty Images

If you haven’t yet made use of your TFSA contribution for this year, it is probably time to get started. After all, the TFSA is one of the best, most versatile wealth-building accounts available today. It is an excellent emergency fund since money can be withdrawn without penalty and be replaced the following year. The contribution room has continued to increase since the registered account was instituted. As of 2019, investors can add an additional $6,000, up from $5,500 last year.

But which stocks should you put into the account? After all, your contribution room is finite. Losses in your TFSA are gone forever, so you need to be careful what types of stocks you buy.

INCLUDE: Utility stocks

Utility companies are excellent cash generators with steadily growing dividends. Check out the long-term returns of companies like Algonquin Power (TSX:AQN)(NYSE:AQN). Since inception, the stock’s chart has done nothing other than move up and to the right, more than doubling over the past 10 years.

The renewable energy company’s dividend has done the same, increasing steadily over time. Last May, Algonquin increased its dividend by 10%. If its earnings also continue to grow and adjusted earnings per share increased 16% over its 2017 earnings, the company should have no issue continuing to grow this payout over time.

INCLUDE: Large-cap, non-dividend U.S. tech

Why non-dividend? The TFSA is a great place to shelter dividends and capital gains tax-free, but they do not shelter U.S. dividends from dividend-paying stocks. This means that you want large, stable, and growing companies to be in your TFSA.

Companies like Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) are in this category. The fact that it does not have a dividend is a benefit in this case. With its total revenue rising 22% year over year, a great balance sheet, and a huge capital-investment programs in its potentially lucrative “Other Bets” category, this is still a growth stock to own.

AVOID: Cannabis stocks

While I’m sure that there are plenty of investors who got in early and made a potful of money from the sector, the truth is that it is highly unlikely that these stocks will continue to deliver over the long term. This blanket statement could apply to any of the stocks in the sector. These companies are too volatile, their earnings too small, and they completely lack dividends.

Companies like Aurora Cannabis (TSX:ACB)(NYSE:ACB) might seem like a great investment has gone up significantly in recent years, but investors should beware. Revenue may have risen 83% in the first quarter of 2019 year over year, which sounds great, but earnings were negative over the same period. Besides, revenue is still too low to justify the $13.8 billion market capitalization. This company is very overpriced, and it’s a situation indicative of all companies in the space.

Be strategic with your TFSA

Of course, you could be lucky and hit the big time in your TFSA. One well-placed marijuana stock could push your holdings sky high. But even then, you have to be lucky when you sell or you could lose it all. So, if I were you, I would stick to steady dividend growers and stable stocks and hold them for the long run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Fool contributor Kris Knutson owns shares of ALGONQUIN POWER AND UTILITIES CORP. and Alphabet (A shares). David Gardner owns shares of Alphabet (A shares) and Alphabet (C shares). Tom Gardner owns shares of Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of Alphabet (A shares) and Alphabet (C shares).

More on Dividend Stocks

Retirees sip their morning coffee outside.
Dividend Stocks

How I’d Invest $1000 in February to Make Easy Passive Income

Looking to earn some extra passive income in February but don't have much cash? Build an easy portfolio with these…

Read more »

sad concerned deep in thought
Dividend Stocks

Is it Worth Investing in Rogers or Shaw Before the Pending Merger?

A Rogers stock and Shaw stock deal looks all but certain, yet should investors still buy the stock? Or are…

Read more »

runner ties shoe while stopped on grass outside
Dividend Stocks

Is Nutrien Stock a Buy in February 2023?

Nutrien stock should benefit from the very favourable supply/demand fundamentals in the agriculture business in 2023.

Read more »

thinking
Dividend Stocks

Is Brookfield Asset Management a Buy in February 2023?

Brookfield Asset Management is among the largest stocks trading on the TSX. Let's see why BAM stock is a buy…

Read more »

Growth from coins
Dividend Stocks

3 Dividend Stocks Growth Investors Should Buy Today

If you want growth AND dividends, then these are the three dividend stocks I would buy right now.

Read more »

sale discount best price
Dividend Stocks

2 Canadian Stocks That Are Simply too Cheap to Avoid

These Canadian stocks have fallen far from all-time highs, but that leaves significant value to lock up, as well as…

Read more »

Payday ringed on a calendar
Dividend Stocks

2 Best Monthly Dividend Stocks for February 2023

Here are two of the best Canadian monthly dividend stocks you can buy in February 2023.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Got $10,000? Create $231 in Passive Income Each Quarter Starting Today!

If you have some cash you're sitting on, now is the time to invest in this passive-income stock that continues…

Read more »