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How to Earn 5.5% in Your TFSA

Income investors are constantly searching for ways to boost the return they get on savings inside their TFSA portfolios.

Using the TFSA to hold REITs and dividend stocks makes sense, especially for retirees who are searching for ways to protect distributions from the taxman. Earnings generated inside the TFSA are also exempt from income calculations, which is important to consider for pensioners who might be at risk of seeing their OAS payments clawed back.

The challenge investors face is trying to decide which REITs or stocks to buy. You want to earn the highest possible yield without putting your initial investment at too much risk. The distributions have to be sustainable and the company’s business must be solid.

Let’s take a look at RioCan Real Estate Investment Trust (TSX:REI.UN) to see why it might be an interesting pick today.

Contrarian choice

RioCan owns shopping malls. That might not sound like an appealing investment prospect with all the news of department stores and clothing retailers going out of business. It is true that some brick-and-mortar players are having a tough time, and RioCan has lost a few tenants in recent years.

Fortunately, no single client represents more than 5% of revenue, and RioCan has so far been able to find new tenants at even higher prices when the big names leave.

Strategy shift

The company knows the industry is changing, and that’s why it is going through a transition. RioCan is selling up to $2 billion in non-core assets in secondary markets to shore up the balance sheet, buy back trust units, and fund ongoing mixed-used developments. As of the Q1 2019 report, the company had completed the sale of $1.3 billion of the properties.

On the mixed-use projects, RioCan has 2,300 units already at various stages of development and an additional 2,000 should be underway by 2021. This puts it well on track to hit an initial goal of adding up to 10,000 residential properties at its top retail locations.

Interest rate hikes appear to be finished in Canada and the United States for the near future, and the next moves could be to the downside. This is positive for RioCan, as it removes risks connected to higher borrowing costs.

Strong cash flow

Revenue for the first quarter came in at $324 million compared to $290 million in the same period last year. Net income was $0.64 per trust unit compared to $0.43 in Q1 2018. As the mixed-use developments move to completion RioCan should see steady revenue growth.

Sustainable payouts

RioCan pays a monthly distribution of $0.12 per unit. This appears sustainable given the revenue stream sheet and positive interest rate environment. Investors can currently pick up a yield of 5.5%.

Upside

Investors could see a distribution increase later this year, and the unit price might even add another 15-20%. RioCan is already up from $24 in early January to $26 at the time of writing. If the U.S. Federal Reserve cuts interest rates in the coming months, the Bank of Canada will likely follow its neighbour. That could put a new tailwind behind RioCan, and it wouldn’t be a surprise to see it take a run at $30 by the end of the year.

If you are searching for a buy-and-hold income pick for your TFSA, RioCan might be an interesting choice today.

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

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