Is this the right time to buy stocks for investors who use their Tax-Free Savings Accounts (TFSAs) to generate savings and long-term wealth?
In this uncertain environment, there is no easy answer to this question. Many strategists still see more downside after markets in North America made the fastest plunge to bear market in history.
Both the S&P/TSX Composite Index and the S&P 500 are down more than 30% from their record highs reached just last month, as the coronavirus pandemic spreads, forcing the governments to lock down their cities. According to Goldman Sachs Group, if the economic fallout from the spreading coronavirus deepens, the S&P 500 could fall another 26% from Friday’s close to 2,000.
Despite all the gloom and uncertainty, one thing is clear: the top-quality dividend stocks are a lot cheaper than they were last month, and they offer a great opportunity to TFSA investors to build their income-producing portfolios.
TFSA investors should focus on the companies that provide basic and essential services and whose revenue are not volatile, such as power and gas utilities.
TFSA stocks to buy
In a Friday note, Raymond James analyst David Quezada upgraded Fortis (TSX:FTS)(NYSE:FTS) to “outperform” after the utility’s stock dropped 20% in the current downturn from its recent highs.
Calling Fortis “the premier defensive name in our coverage universe,” he cited the company’s diversified assets, highly regulated earnings and $18.8 billion capital plan that faces “minimal risk.”
St. John’s-based Fortis has a diversified asset base, providing electricity and gas to 3.2 million customers in the U.S., Canada, and in Caribbean countries. Its U.S. operations account for about 60% of its regulated earnings, while the rest comes from its Canadian and Caribbean operations.
It’s not just utilities that have gotten hammered in this indiscriminate sell-off. Canada’s top telecom stocks have also become cheap for TFSA investors who want to invest and earn growing dividends.
What supports stability in their cash flows is that no matter what happens to the economy, we have to pay our internet and cellphone bills. These recurring cash flows allow these companies to keep hiking their payouts regularly.
In this space, I like BCE (TSX:BCE)(NYSE:BCE), Canada’s largest telecom operator with a massive moat that helps the company generate strong cash flows. This leading position in the industry means that TFSA investors will continue to benefit, as the company rewards its investors with higher payouts each year.
BCE stock has lost about a quarter of its value just in a month. Trading around $48 a share, it now yields a massive 7%. At this level, TFSA investors will be getting $3.33-a-share annual dividend.
Bottom line
Dividend stocks such as utilities and telecom operators are low-risk investments that are becoming attractive again after this steep sell-off. TFSA investors could start building their long-term income portfolios by buying these stocks at a much lower level and higher yields.
Whether you’re looking at utilities or other sectors, the key to successful investing is to always stay diversified and focus on the long term.
