Many Canadians make at least some use of their Tax-Free Savings Accounts (TFSAs). One popular play is to pad them out with income stocks. TFSA investors need to be principled, though. Sure, it’s not always easy to find fairly valued stocks that match decent yields with stable growth forecasts. But dividend investors should not despair, because such names definitely exist.
Boring is good when it comes to dividend stocks
In terms of doubt, the Oracle of Omaha often has a few words of applicable wisdom. Let’s consider the following maxim of Warren Buffett: “Beware the investment activity that produces applause; the great moves are usually greeted by yawns.” Buying into stocks that are dependable might not be exciting, but that’s kind of the point.
“Think dull” is good advice for anybody building a personal investment portfolio centred on predictable stocks that will carry on churning out passive income for years to come, because short-term volatility is the norm when it comes to the markets. And that’s why finding truly boring stocks is both difficult in the near term and rewarding in the long term.
But it doesn’t have to be difficult. Some names are instantly recognizable to new investors. One such business is Fortis (TSX:FTS)(NYSE:FTS). This stock has more than four-and-a-half decades of dividend payments under its belt. It’s also as dull as they come, with its dependable distribution fed by a comprehensive utilities network that’s so well established as to be virtually unassailable.
As such, Fortis is a wide-moat name in a classically defensive sector. Its dividend yield of 3.7% is moderately rich, and its market ratios are reasonable. This is a nicely valued name that will reward forever investors with dependable income for years to come.
Now is the time to build and trim
It may be easier to buy stocks for their defensive properties than it is to sell them. Investors should be building positions on weakness right now. But they should also be trimming names from their portfolios.
In Ray Dalio’s book, Principles: Life and Work, the hedge fund manager proselytizes, “Life is like a giant smorgasbord with more delicious alternatives than you can ever hope to taste. Choosing a goal often means rejecting some things you want in order to get other things that you want or need even more.”
This persuasive philosophy could be applied just as well to stocks as to anything else. Investors need to be selective when it comes to building a stock portfolio for long-term passive income. While diversification is key, there’s more to spreading risk than simply packing random names in a TFSA from a multitude of sectors.
But knowing which names to sell is also key. Markets have been rallying ever since their recovery from the March selloff. But just as investors sold everything in March, they have also been buying everything ever since. That means that now is a good time to cash in a few shares in overpriced but underwhelming names. This will also free up capital to redistribute into stronger names.