The Motley Fool

A Top TFSA Stock to Buy With a Dividend Yield of 6%

Image source: Getty Images.

If you’re using your Tax-Free Savings Account (TFSA) to build a reliable income stream, you don’t have many top-quality stocks available these days.

After the COVID-19-triggered recession, many companies have cut their dividends to preserve cash. There is also considerable uncertainty regarding the pandemic’s future course. It’s still raging in the U.S. and globally, making the economic recovery much difficult.

In this uncertain economic environment, it makes sense for TFSA investors to only buy solid, top-quality stocks that have the power to weather this economic downturn. Today, I’ll analyze one such stock from Canada for your long-term investment.

Why top banking stocks?

In Canada, the nation’s top bank stocks should be on the top of your TFSA buying list. After the recent sell-off, their dividend yields have become attractive. But buying a stock with a high dividend yield often comes with a greater degree of risks. 

The stocks that pay higher returns might be facing intense competition, and their balance sheets could be loaded with debt. However, you can’t beat the market without taking some extra risks and buying stocks whose values are depressed due to some short-term issues. 

Canadian banking stocks have offered some of the best returns to long-term investors due to the strength of their businesses. In general, these stocks return between 40% and 50% of their income in dividends. If you’re interested in top banking stocks for your TFSA, the next step is to find the best opportunity available to you after this market crash.

The 10 Best Stocks to Buy This Month

Click here to learn more!

Why CIBC?

In this market, I particularly like Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM), the nation’s fourth-largest lender. Its stock is down about 13% this year and 9% in the past 12 months. 

CIBC stock is now trading around $93.54 at writing, offering an annual yield of 6.23%. That yield is much higher if you compare it with what you can earn on a savings account or GICs. But there are reasons for this underperformance.

The lender’s weakening earnings and its exposure to the nation’s mortgage market are some of the major factors that could keep its price depressed in the short run.

But I believe the period of this sluggish growth will be temporary. The monetary and fiscal support is reviving the Canadian economy quickly, and the pandemic is coming under control.

The bank’s provision for bad loans surged more than five-fold in the last earnings report as the lender’s profit declined. But CIBC said it was maintaining its quarterly dividend at $1.46 per share.

“Our capital position remains strong, giving us flexibility and resilience as we navigate the current environment and continue to advance our long-term client-focused strategy,” said CEO Victor Dodig in the eearnings release.

Short-sellers have also targeted CIBC in the past due to its vast exposure to the Canadian mortgage market, betting that a possible collapse in the housing market will sink the lender as well. That devastating scenario hasn’t played out, however, and is losing its appeal.

Bottom line

With an annual dividend yield of over 6% at the time of writing, CIBC stock has a compelling appeal for TFSA investors. Its current dividend yield is one of the best among the major banks with little risk of that being slashed.

Speaking of TFSA stocks, here are our best picks for this month.

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.

Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

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 Haris Anwar has no position in the stocks mentioned in this report.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.