Where should you invest your $6,000 Tax-Free Savings Account (TFSA) contribution in 2020?
Market crash
The 2020 market crash initially wiped more than 30% off the TSX Index in a matter of weeks. The pandemic continues to spread around the globe, but many countries appear to be past their peak. China, Europe, the U.S. and Canada are moving to reopen their economies, but analyst expectations for a global economic recovery range from a V-shaped rebound to an L-shaped depression.
Companies continue to cut jobs. In Canada, 7.8 million people already applied for the Canada Emergency Response Benefit. It is unknown how quickly businesses can get back on track.
Based on the market rebound, investors apparently have a positive view. The bounce in the Canadian stock market off the March 23 low saw the TSX Index climb from 11,228 to 15,228 by April 29. At the time of writing, the market is back down to 14,300.
While investors who had the courage to buy at the bottom are still sitting on decent gains, we have no idea where the market is headed in the coming weeks or months.
Best stocks to buy now?
History suggests that buying top-quality stocks during a market correction can provide a nice boost to the long-term returns investors see in their retirement portfolios. In the current environment, it makes sense to seek out industry leaders with strong businesses that provide essential services.
The best companies tend to enjoy sustainable competitive advantages in their sectors. In addition, they demonstrate strong track records of paying dividends supported by free cash flow.
With this in mind, let’s take a look at one top Canadian stock that has delivered great results for investors and should be an attractive pick right now for a TFSA retirement fund.
CN
Canadian National Railway (TSX: CNR)(NYSE: CNI) went public in 1995. Since then, the company had proven to be one of the best investments on the TSX Index.
CN operates a unique network of rail lines across Canada and through the United States. The company is the only player in the industry with tracks that connect ports on three coasts. CN is key component of the efficient operations of the Canadian and U.S. economies, transporting $250 billion in cargo annually.
The pandemic lockdowns will put pressure on 2020 revenue. However, demand for CN’s services will rebound as factories get back into operation and the broader economy begins to recover.
CN is a very profitable business, giving TFSA investors great exposure to the United States through a Canadian stock. The company does a good job of allocating profits to both capital programs and payments for shareholders.
CN spent nearly $4 billion last year on new capital projects, including new locomotives, additional rail cars, and network upgrades.
The board raised the dividend by a compound annual rate of about 16% since the IPO. CN also buys back stock. The current dividend provides a yield of 2%.
Long-term investors have done well; a $6,000 investment in CN just 20 years ago would be worth about $125,000 today with the dividends reinvested.
The bottom line
There is no guarantee CN will deliver the same results in the next 20 years. However, the stock appears cheap right now and buying on dips tends to be a good strategy.
CN trades at $110 per share at the time of writing, compared to $127 in February. It would be great to pick the shares up near the March bottom below $100, but buy-and-hold investors might want to consider start a position near the current level.
Five years from now, the stock should be higher.
