TFSA Investors: How to Protect Yourself if the Market Corrects

Invest in Fortis to create a passive-income source that keeps growing your TFSA to offset the losses caused if a market crash happens this year.

| More on:
stock market

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

The Tax-Free Savings Account (TFSA) was designed to help Canadians improve their savings practices and achieve their financial goals. Considering that the primary purpose of the account is to help you secure your financial freedom, you need to be careful with how you manage investments in your TFSA.

If the market crashes in 2021, you could incur significant losses of 30% or more within your tax-advantaged account. Remember that any losses you incur due to a market crash are not withdrawals or part of your contribution room. The maximum contribution room will remain the same, and you cannot gain back your TFSA losses caused by a market crash.

Why many Canadians prefer investing in stocks for their TFSAs

TFSA users can use their contribution rooms to hold cash or assets of the equivalent value. It means that you can use your TFSA to hold bonds and Government Income Certificates (GICs). Bonds and GICs are fixed-income assets that can provide you with guaranteed returns on your investments. However, the potential return is not as high as what you can get with equity securities.

Using your TFSA contribution room to hold stocks can provide you with much more substantial returns. Any earnings through capital gains and dividend payouts from stocks in your TFSA can grow without incurring any taxes or affecting your contribution room. It is essential to allocate the contribution room to stocks that can weather a market crash to avoid permanent losses in your TFSA.

Fortify your TFSA for capital protection

Fortis (TSX:FTS)(NYSE:FTS) is an excellent asset to consider for this purpose. With bonds yielding 1.5% over 10 years on average, investing in Fortis could be a far better investment for your TFSA in terms of returns without adding substantial risk to your portfolio.

Fortis is a Canadian Dividend Aristocrat with an almost 50-year dividend-growth streak. The company does not just provide you with reliable dividends — it keeps growing how much it pays its shareholders each year. Fortis is paying its shareholders at a juicy 4.07% dividend yield at writing. It means that investing in the stock could provide you with 4.07% annual returns through its dividends alone.

Fortis uses its predictable income to finance its growing dividend payouts comfortably. Additionally, the company is constantly growing through acquisitions. The company plans to expand its rate base over the next few years and increase its cash flows even further. Between its capital gains and virtually guaranteed dividends, you can get far better returns on your investments in the TFSA.

Fortis is also an excellent asset to consider in case a market crash takes place. Unlike most other companies trading on the TSX, Fortis can continue generating predictable revenues during market crashes. It provides essential services for all industries and individuals, ensuring strong cash flows for the company regardless of market environments.

Foolish takeaway

Using your TFSA contribution room to hold assets that could decline significantly without recovering can result in permanent losses for you in case of a market crash. Fortis could be a much safer investment for your TFSA portfolio due to its increasing dividends and virtually guaranteed returns. It could be a strong foundation for your TFSA portfolio.

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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.

More on Dividend Stocks

Woman has an idea
Dividend Stocks

2 Low-Risk Growth Stocks Paying Great Dividends

These top TSX dividend stocks give investors exposure to interesting growth opportunities.

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

Got $300? 2 Simple TSX Stocks to Buy Right Now

These two simple TSX stocks have everything a long-term investor looking to dollar cost average into a position wants right…

Read more »

A golden egg in a nest
Dividend Stocks

Millennials: No Excuses! Start Saving for Retirement Right Now.

Millennials, we need to stop complaining and start bragging. We're great savers, so it's time to start investing in TSX…

Read more »

Value for money
Dividend Stocks

3 UNDERVALUED TSX Stocks to Buy in August

Here are some attractively valued TSX stocks for the long term.

Read more »

A young man throwing and catching his daughter above his head
Dividend Stocks

Parents: Double Your CCB Payments This Month!

Parents can use those CCB payments to their benefit and double them this year month after month -- no waiting,…

Read more »

stock market
Dividend Stocks

I’m Buying These 3 Resilient Stocks During a Bear Market

TD Bank stock is among the three stocks I'm buying to protect my portfolio from a bear market and to…

Read more »

edit Safety First illustration
Dividend Stocks

4 of the Safest Dividend Stocks on Earth Right Now

These dividend stocks offer up strong dividends, a cheap share price, and safety from growing, safe sectors of the market.

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

Change Your Future: What to Hold in a TFSA in 2022

Holding dividend growth stocks in a TFSA long-term can change the financial futures of worried Canadians.

Read more »