A Tax-Free Savings Account (TFSA) gives investors the ability to earn income on a tax-free basis. It’s a rarity when you consider that the Canada Revenue Agency wants to know about all of your income, whether from employers, side businesses, and anything that you would’ve made money from. The one glaring exception is the TFSA, and that’s what makes it so special –and why investors should make the most of it.
Unfortunately, that isn’t always the case. One of the biggest mistakes you can make is saving money, putting into a TFSA, and then to just treating it as a regular savings account. While you may not be losing your money, you’re also not making the most of it, either. Economists would call this an opportunity cost, especially given that you can earn a decent long-term return with minimal effort.
One investment that’s always a good long-term buy
Even though many stocks look expensive right now and may not be good options for your portfolio, that doesn’t mean that there aren’t safe investments out there. One example is a top bank stock like Royal Bank of Canada (TSX:RY)(NYSE:RY). Bank stocks haven’t done well this year, and shares of RBC are flat in 2020 as concerns surrounding the economy have investors concerned that there may be tough times ahead.
But when you’re looking for a long-term investment, it’s hard to go wrong with a bank stock. Not only do they do well when the economy’s strong, but they also have great margins and can do well even when things aren’t going so great, like right now. RBC released its third-quarter results on August 26 for the period up until July 31, and even with the country in the midst of a recession, the bank still posted a profit of $3.2 billion.
That’s down just 2% year over year. And in good years, its bottom line will continue growing. In fiscal 2019, RBC recorded a profit of $12.9 billion, up 3.7% from the previous year.
There’s little risk investing in a Big Five bank like RBC, which is why even if you don’t know where to invest your money into, consider a bank stock. If RBC’s stock is struggling and falling in value then great, you can buy it at a discount. Over the long term, it’s likely to continue rising in value.
As long as you hang on to it long enough, odds are you’ll make a good profit from owning it. And another reason to put it in your TFSA is that it also pays a great dividend.
Shareholders currently receive quarterly payments of $1.08 per share, which yields 4.2% annually. If you were to invest $25,000 into the stock, that would earn you $1,050 in dividend income each year, at least. Another great thing about bank stocks is that they typically raise their payouts. RBC’s current dividend payment is 2.9% higher than the $1.05 it was paying a year ago.
Bottom line
Regardless of the economic situation, you can normally find a good, safe stock to invest in that do more for your portfolio than just leaving the money idle or in a TFSA account. Whether it’s a bank stock or even a utility stock, there are plenty of safe investments to choose from.
