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Retirees: Should You Buy CIBC (TSX:CM) Stock for a TFSA Income Portfolio?

Canadian retirees can take advantage of the tax-free status of the TFSA to hold high-yield dividend stocks that can produce attractive income to supplement their employment and government pensions.

The strategy is popular with this demographic because the distributions do not count toward the income calculations used by the government when determining potential claw backs on Old Age Security payments.

Let’s take a look at one high-yield Canadian stock that might be an interesting pick right now.

CIBC (TSX:CM)(NYSE:CM)

CIBC’s share price has rallied about 10% off the December low, but the stock still appears oversold, trading at just 10 times trailing earnings.

The market normally discounts the bank compared to its peers due to its smaller size and heavy focus on the Canadian economy. CIBC has a very large Canadian residential mortgage portfolio, which might be part of the reason that investors aren’t willing to pay as much for the stock.

A total meltdown in house prices wouldn’t be good, but Canadian homeowners have weathered the rate hikes over the past two years relatively well and it appears the Bank of Canada is going to be on hold for the balance of 2019. Some analysts even predict a rate cut could be in the cards.

As long as employment levels remain strong, there shouldn’t be too much housing risk, and even if the market undergoes a rough patch, CIBC is more than capable of riding it out. The bank is well capitalized, and house prices would have to fall significantly before the portfolio takes a material hit.

Management is working to diversify the revenue stream and the US$5 billion purchase of Chicago-based PrivateBancorp is a good start to balancing out the risks. The U.S. division has strong growth potential, and investors could see additional tuck-in deals in the coming years, especially in the wealth management segment.

CIBC remains a very profitable bank and dividend growth should continue. Adjusted return on equity was 16% in fiscal Q1 2019 and the company just increased the quarterly distribution from $1.36 to $1.40 per share. That’s good for a yield of 5% at the current stock price.

Should you buy?

CIBC held its dividend steady through the Great Recession, even as it took billions of dollars in write-downs on bad bets in the subprime loan market. The company arguably carries less risk today than in the past, and the market might not be giving the current management team enough credit for the changes that have been made to diversify the income stream.

If you’re looking for above-average yield and a shot at some decent long-term upside, CIBC appears attractive today for an income-focused TFSA portfolio.

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Fool contributor Andrew Walker has no position in any stock mentioned.

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