Tax-Free Savings Account (TFSA) users who have maxed out the contribution limits in 2020 can start growing their account balances come January 2021. The Canada Revenue Agency (CRA) announced that $6,000 would again be the coming year’s annual contribution limit.
For those who have not opened a TFSA since it was created 2009 but are eligible, the accumulated contribution room is at $75,500. Some will argue that the Registered Retirement Savings Plan (RRSP) is more beneficial, because contributions are tax deductible.
While you can’t deduct contributions from income, the TFSA account is an equally powerful investment tool, if not more flexible. All gains and interest earnings are 100% tax-free. You can also withdraw at any time and not worry about a penalty tax. Instead of comparing with the RRSP, start prospecting your TFSA stock picks for 2021.
A logical choice
Independent midstream energy company Keyera (TSX:KEY) is a logical choice for TFSA users who want higher returns for a $6,000 investment. At $23.92 per share and an 8.03% dividend, you get a good deal. The energy stock is trading at a 24% discount. Analysts recommend a buy rating and forecast the price to climb by 25% to $30 in the next 12 months.
The amount of your new TFSA contribution limit will produce $481.80 in tax-free income. Hold it for 20 years and reinvest the dividends every time. Your capital will swell to $28,121.52, or exponential growth of 469%, to $29,725.99 in 20 years. Keyera’s dividend growth (8.9% CAGR in the last five years) has been steady since 2003.
Keyera is not an oil producer but provides oil and gas producers essential services in the Western Canada Sedimentary Basin. Since the company generates cash flow streams from fee-for-service contracts, the risk of commodity price fluctuations is negligible. The immediate goal is to have more of the same arrangements so that the contribution to realized margin would be more than 75%.
Visible organic growth
TransAlta Renewables (TSX:RNW) is the next-best choice after Keyera. The dividend payouts should be stable and recurring for years on end. This utility stock trades at less than $20 per share and pays a juicy 5.34% dividend.
If Joe Biden’s administration in the U.S. champions the clean energy revolution in 2021, this $4.7 billion renewable energy company will benefit greatly. Currently, TransAlta owns and operates one solar facility, seven natural gas plants, 13 hydroelectric facilities, and 23 wind farms. The wind asset contributes the most (50%) to cash flow.
TransAlta’s diversified assets are strategically located in growing industrial regions, although the wind portfolio remains its strongest tailwind. The demand for new wind projects is high in Canada, Australia, and the United States. Organic growth is inevitable, given the abundant opportunities in the renewable energy space.
In October 2020, TransAlta’s milestone energy storage project, WindCharger, started commercial operations. It’s the first utility-scale battery storage project in Alberta, and it utilizes Tesla battery technology. The latest milestone affirms TransAlta’s commitment to providing clean, reliable, and low-cost energy solutions.
TFSA users who have been saving throughout the pandemic can reinvest in high-yield dividend stocks with their new contribution limits. Also, with the tax season coming, the earnings are excellent tax shields.
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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 Christopher Liew has no position in any of the stocks mentioned. David Gardner owns shares of Tesla. Tom Gardner owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool recommends KEYERA CORP.