How to Max Your TFSA Limit With TSX Stocks

Here’s how dividend stocks like Fortis Inc. (TSX:FTS)(NYSE:FTS) can help balance a Tax-Free Savings Account built around shorter-term capital gains.

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Finding reliable sources of passive income is of the utmost importance during times of high economic uncertainty. Financial stability has rarely been as crucial as it is today. That’s just one reason why investors should be making full use of their Tax-Free Savings Accounts (TFSAs) at the moment. But even those investors who use their TFSAs may not be taking full advantage of this great financial tool.

So, should investors fill up their entire $6,000 limit for 2020? A TFSA offers a secure source of emergency funding — just right for these uncertain times. That’s why investors today might want to think about padding out those savings accounts as much as possible. One way to do this is to cherry-pick names from the full range of the risk spectrum.

Great names to pack in the stock segment of a personal investment portfolio include Canadian banks, utilities, and infrastructure names. Sturdy examples of these include TD Bank, Fortis, and CN Rail. In fact, with just these three stocks, an investor can gain access to some of the best sources of dividends in the country. However, investors should pack quality and not chase yields right now.

The great thing about dipping into a TFSA during an emergency is that there are no tax consequences from doing so. Dividend stocks can help investors feather a retirement nest over the long term, or level-up a down payment fund for first-time home buyers. Tax-free capital gains can also be a great way to accelerate wealth generation over the shorter term, though. High-momentum tech stocks are therefore also a key buy for a TFSA.

Buy stocks from both ends of the risk spectrum

Dividend stocks are a core investment type that help to balance a TFSA centred on short-term gains. But investors should be aware of the glittering spectrum of value opportunities out there right now that could skyrocket on good news. Names like Air Canada and Manulife Financial have been thoroughly chewed up by recent market movements; however, these blue-chip names could rally at the drop of a pin.

TFSAs can also accommodate stocks from other sections of the risk spectrum. The current market has chewed up a lot of names normally worthy of a TFSA. Investors expecting a recovery in 2020/2021 should think about stacking shares in bargain-quality stocks. Names like Manulife combine wide-moat market leadership in essential industries; this one is down 25% since February.

Dividends and defensive stocks help to anchor a TFSA already packed with high-risk, high-reward names. But perhaps the greatest source of portfolio strength for a TFSA investor right now comes from diversification. TFSA investors should be stacking shares in diversified names laden with long-term passive income right now — names like TD Bank, CN Rail, and Fortis.

In summary, by spreading investments across the risk spectrum, investors can balance out shorter-term capital gains generators like Shopify and Kinaxis. Meanwhile, a selection of names from the riskier end of the TSX, currently populated by the likes of Air Canada and Manulife, can bring short-term gains in the event of a full or partial market rebound.

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 Victoria Hetherington has no position in any of the stocks mentioned. David Gardner owns shares of Canadian National Railway. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Canadian National Railway, Shopify, and Shopify. The Motley Fool recommends Canadian National Railway and KINAXIS INC.

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