TFSA Investors: Why Growth Stocks Might Be Better Buys Than Dividend Stocks

Investors of High Liner Foods Inc (TSX:HLF) know all too well how quickly things can turn south for a dividend stock.

| More on:
Growing plant shoots on coins

Image source: Getty Images

If you’re looking for an investment to put in your TFSA, a dividend stock can often seem like the default option. It pays a recurring amount every month or quarter, and it’s a mature enough stock that it may seem like a safe buy.

However, as long as it’s an eligible investment inside your TFSA, it doesn’t matter whether a stock is paying you dividends or if you’re benefiting from capital appreciation; either way, you’ll be earning tax-free income.

While growth stocks may not offer anything in the way of dividends, they could more than make up for that with their overall returns. Dividend stocks sometimes fail to produce good returns, and in some instances, investors may see the dividend income only offsetting the stock’s losses and, in some cases, even falling short of that. Dividend stocks can give investors a false sense of security.

A good example is High Liner Foods (TSX:HLF), which, earlier in the year, was paying as much as 7.4%. In 2018, however, the stock had lost nearly half of its value, and so the high yield may not have been terribly helpful for dividend investors.

The company would ultimately go on to slash its dividend payments from $0.145 every quarter to just $0.05. Now, High Liner’s yield is around just 1.9% — a far cry from where it was a year ago. The stock had also been increasing its dividend payments over the years, so it is doubly bad, as not only has it become less likely that the company will hike its payouts in the future, but they have also been drastically reduced.

It’s an important reminder for investors that dividends are never a guarantee. Even a company that has a long track record of dividends is not immune from a cut. And without a dividend, there may be little reason for investors to hang on to a stock. That’s where investing in a growth stock may be a more attractive option.

Take, for example, a stock like (NASDAQ:AMZN), which has become the poster boy for growth stocks and high returns. While the tech giant doesn’t pay a dividend and likely won’t pay one anytime soon, it has still produced very good returns for investors. In 2018, the stock had risen more than 26%, and through the first seven months of 2019, it is up another 21%.

As big as Amazon is, it’s still proving to be a good investment today. A dividend stock paying more than 5% per year combined with an above-average return of 10% would still fall short of what Amazon would have been able to produce. However, it’s important to remember that just because Amazon has seen 20% returns doesn’t mean that they’re a guarantee either.

Bottom line

The key difference is that with Amazon, the company isn’t going to be limited by a dividend or the expectations that it will have to continue paying one to keep investors happy. By not being weighed down by a dividend, the company has a lot more flexibility, and that’s where it could be a better buy for TFSA investors.

When there’s no advantage as to whether the income generated comes from dividends or capital appreciation, then growth stocks may be the better buys.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor David Jagielski has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon.

More on Dividend Stocks

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

Passive Income: How to Make $106 Per Month Tax Free

Holding quality, high-yield dividend stocks such as Freehold Royalties in a TFSA can help you earn tax-free income for life.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How to Earn a TFSA Paycheque Every Month and Pay No Taxes on it

Stocks like First National Financial (TSX:FN) pay you monthly. You can also earn monthly dividends through portfolio diversification.

Read more »

stock analysis
Dividend Stocks

1 Dividend Superstar I’d Buy Over TD Bank Stock

TD (TSX:TD) stock may look undervalued, but there are reasons for the price drop. Meanwhile, this dividend superstar has more…

Read more »

A steel grain silo storage tank with solar panel in a yellow canola field in bloom in Alberta, Canada.
Dividend Stocks

Down by 26.77%: Now Might Be the Perfect Time to Buy Nutrien Stock

This TSX stock has seen share prices fall by over 26% from its 52-week highs, but it might be the…

Read more »

Woman has an idea
Dividend Stocks

2 No-Brainer Stocks to Buy Now With $7,000

Two relatively cheap cash cows are no-brainer buys for investors with $7,000 to invest.

Read more »

dividends grow over time
Dividend Stocks

Buy This High-Yield Dividend Stock in July 2024

Buy this high-yielding dividend stock to lock in inflated yield into your portfolio to generate solid passive income for years.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

Where Will Dollarama Stock Be in 3 Years?

Dollarama stock has done incredibly well during economic uncertainty, but what about when the markets recover in the next three…

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

TFSA – 2 Canadian Stocks to Buy and Hold for Tax-Free Gains

Canadian stocks like Brookfield Corp (TSX:BN) can make wise TFSA holdings.

Read more »