Prep Your TFSA, Because a Market Crash Could Wipe Out 50% of It

A market crash can be contained to prevent the depletion of your TFSA balance. The Fortis stock is as a safe as bonds because its low-risk business model is a defense against economic downturns.

| More on:
hand using ATM

Image source: Getty Images

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

Canadians are fortunate to have an investment account like the Tax-Free Savings Account (TFSA). You can see your savings grow tax-free over time through the power of compounding. After several years of investing, you can withdraw a portion of the balance or the entire amount without paying taxes.

It’s a delight that the TFSA room expands when the value of the assets within the account grows. However, your balance can also shrink due to bad investment decisions.

However, a market crash could compound your miseries, especially if your choices are risky investments. The downturn could wipe out your entire TFSA balance.

Shift to safer ground

There are steps you can take to prep your TFSA without sabotaging it. Diversification is the suggested action. You can have a combination of bonds and stocks to shield your TFSA from a severe bear market.

When equities are tumbling, investors flee from the stock market and shift to bonds. Safety takes precedence even if the returns on bonds are lower.

If you compare the general characteristics of bonds and stocks, the former has low volatility, but the potential upside is relatively small, if not fixed.

Whereas with stocks, there is higher volatility, but the potential upside is limitless. However, the likely downside is that you can lose everything. You can also lose in bonds, but you can recover some from the assets of the bond issuer.

Bond-like stock

Although bonds offer greater safety than stocks, the limited upside is the biggest drawback. Luckily, there’s a stock with unique features and can ride out a market crash. Fortis (TSX:FTS)(NYSE:FTS) is a utility stock that tends to be resistant to economic cycles.

Income investors are treating this $22.91 billion regulated electric company like a bond. Long-term investors in Fortis rely on this utility stock for income. Had you purchased $10,000 worth of shares in 1999, your total return today would be 1,206.80%, with a corresponding value of $130,701.01.

Note that the investment period is inclusive of the 2008 financial crisis, which lasted for three years. At the start of 2008, FTS was trading at $27.97 at writing.

By the end of 2010, the price was $33.98, or an appreciation of 21.45%. As of this writing, Fortis is at $52.27, a 53.82% escalation in nine years.

Prep your TFSA

Over the years, Fortis has been growing its earnings per share (EPS) at an awe-inspiring rate. The company’s dividend growth streak of 45 years is similarly imposing.

You wouldn’t think twice about investing in a utility stock that pays a 3.62% dividend, and sustainable for generations to come.

Fortis is an income-generator for conservative investors and retirees alike. For the next five years, the company has allocated an $18.3 billion capital expenditure.

It will help grow its dividend by 6% annually through 2024. Similarly, its regulated long-term contracts and investment-grade balance sheet will support the projects in the pipeline.

Rather than panicking and worrying about a capital loss in your TFSA, simply mitigate the risks. You can keep a portion of your savings in cash, bonds, and a stock like Fortis whose low-risk business model will not fall with a market crash.

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 Christopher Liew has no position in any of the stocks mentioned.

More on Dividend Stocks

stock research, analyze data
Dividend Stocks

RRSP Investors: 1 Cheap TSX Dividend Stock to Buy Now and Own for 35 Years

RRSP investors can still find top TSX dividend stocks to buy at discounted prices.

Read more »

Cogs turning against each other
Dividend Stocks

2 of the Safest Stocks (With Dividends) to Buy in Canada Now

Here are two of the safest stocks investors in Canada can buy now.

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

2 Top Canadian Value Stocks Worth Buying Right Now

Here's why Alimentation Couche-Tard (TSX:ATD) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) are two top value stocks to consider right now.

Read more »

Happy shoppers look at a cellphone.
Dividend Stocks

2 Bargain Stocks You Can Buy Today and Hold Forever

Here's why Fortis (TSX:FTS)(NYSE:FTS) and Manulife (TSX:MFC)(NYSE:MFC) are two bargain stocks I think are worth considering right now.

Read more »

Retirement plan
Dividend Stocks

Passive Income: How Canadian Couples Can Earn $747 Tax-Free per Month for Life

Canadian couples can take advantage of their TFSA contribution space to create a significant stream of tax-free passive income.

Read more »

Golden crown on a red velvet background
Dividend Stocks

3 Canadian Dividend Aristocrats to Buy for Passive Income Forever

Passive-income stocks like BCE (TSX:BCE)(NYSE:BCE) should be on your radar.

Read more »

potted green plant grows up in arrow shape
Dividend Stocks

4 High-Growth Stocks I’d Buy Before the Summer Ends

Top growth stocks like Park Lawn Corporation (TSX:PLC) and others are well worth picking up even as the Canadian market…

Read more »

stock data
Dividend Stocks

2 Top Canadian Dividend Stocks to Buy Now for a Self-Directed RRSP

RRSP investors can still find top TSX dividend stocks trading at cheap prices to buy for a self-directed portfolio focused…

Read more »