TFSA Investors: Should You Invest in “Hot IPOs” or Stick to Dividend Stocks?

While hot IPOs like Lightspeed POS Inc (TSX:LSPD) can deliver quick returns, dividend stocks may provide more long-term value.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

In today’s market, investors have many options to choose from. Between growth stocks, dividend stocks, and managed products, it can be hard to decide what to buy. Of course, you always have the option of buying a little of everything. But the more you diversify, the lower your chances of beating the market. The safest equity investments on earth are index ETFs, which spare you much volatility but guarantee that your returns will only be average.

If you’re looking to do a little better than the market, you need to concentrate your holdings to some extent. Although almost all investors diversify, many successful investors, like Warren Buffett and Phil Fischer, recommend only owning a few stocks. Owning, say, three or four stocks gives you a measure of diversification, while not killing your chances of doing better than average.

If this is the kind of approach you want to take, then you need to decide which types of stocks you’ll be investing in. Will you buy recent IPOs and try to get rich? Or will you stick to blue-chip dividend payers and play it safe? It’s a decision that every stock picker has to make (barring those who opt for a bit of both). The following are three considerations to help you make your choice.

Potential returns

Emerging growth stocks, including recent IPOs, have higher potential returns than blue-chip dividend stocks do. The bigger something gets, the less able it is to keep up past growth, so naturally, the smaller stocks have further to go — if everything goes right. If you look at the recent TSX IPO LightSpeed POS, for example, you’ll notice that it quickly rose over 90% from its IPO price in just a few months. That’s a stellar return that even the best blue chips rarely match, and Lightspeed is only a bit player in the grand scheme of things.

However, for all the potential upside IPOs have, they can also do quite poorly. Lyft, for example, tanked after its IPO, despite the broader markets doing quite well at the same time. A higher potential ceiling doesn’t mean higher returns. With that established, we can move on to dividend stocks.

Income generation

Dividend stocks are typically, but not always, blue chips that are less volatile than their growth-oriented peers. Most of them have steady and dependable earnings histories, which allows them to pay a portion out to investors.

Consider a stock like Enbridge (TSX:ENB)(NYSE:ENB) for example. Enbridge has paid a dividend every single quarter for the past five quarters and increased its payout from $0.67 to $0.73 in Q1. It’s all thanks to the company’s steady revenue and growing earnings, which increased from $250 million four years ago to $2.8 billion last year. Although Enbridge’s stock price gains haven’t been amazing, the income paid from the shares has been solid. And with the company raising its dividends by about 13% a year, investors have seen their payouts increase over time.

Foolish takeaway

Ultimately, the decision to invest in growth stocks or dividend stocks comes down to risk tolerance. Growth stars and IPOs have more potential upside, while dividend stocks are a more certain thing. All investors could use a little of both in their portfolio. Just remember that high risk doesn’t guarantee high returns.

Should you invest $1,000 in Cineplex right now?

Before you buy stock in Cineplex, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Cineplex wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool owns shares of Enbridge and Lightspeed POS Inc. Enbridge is a recommendation of Stock Advisor Canada.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

analyze data
Dividend Stocks

How I’d Invest $28,000 in Canadian Natural Resource Stock to Amass Personal Wealth

Investing in TSX dividend stocks such as Enbridge can help you earn a passive-income stream in 2025.

Read more »

hand stacks coins
Dividend Stocks

Got $400? How I’d Start Building Income With 3 High-Yield Stocks for the Long Term

These high-yield dividend stocks have a solid payout history, making them compelling investments to generate passive income.

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

I’d Put $15,000 in These 3 Dividend-Growth Champions for Increasing Income Potential

Want to offset some volatility? Here are three defensive dividend-growth champions that can generate a juicy yield right now.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

Transform Your TFSA Into a Cash-Creating Machine With $7,000

Discover how the Tax-Free Savings Account can be your golden goose for generating cash without losing your investment.

Read more »

monthly desk calendar
Dividend Stocks

How I’d Invest $10,000 in Canadian Value Stocks for Monthly Dividend Income

A $10,000-diversified portfolio of value stocks focusing on dividend safety, yield, growth, and payment schedules can provide a reliable source…

Read more »

a person watches a downward arrow crash through the floor
Dividend Stocks

Is This Correction Your Chance? Top 4 Canadian Dividend Stocks on Sale

Stocks may be down, but now is your chance to get some of these top dividend stocks on sale.

Read more »

Confused person shrugging
Dividend Stocks

Where to Invest $2,500 in the TSX Today

These TSX stocks offer attractive dividends and a shot at decent upside on a rebound.

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

Invest $25,000 in These Dividend Stocks for $1,956.66 in Annual Passive Income

Dividends stocks can make a huge difference, even if shares don't move an inch. And these might be the best.

Read more »