Some experts believe we’re already in a recession that will go fully fledged by the end of 2022 or early next year. However, new investors shouldn’t fear recessions. Recessions are a part of the business cycle after a period of economic expansion. Eventually, after a period of recession, the economy will eventually go into expansion mode again.
Recessions typically come with financial market downturns. In fact, the stock market is a leading indicator, meaning that it tends to fall ahead of an official announcement of a recession (that may or may not happen). No one knows when the bottom will be in. All I know is that it’s a good time to shop for great stocks when their prices fall.
Here are some quality TSX stock ideas if you have excess cash that you don’t need for a long time. A long investment horizon will increase your chance of earning a profit. In fact, if you invest in stocks that are able to grow persistently, the holding period could be until or through retirement for wealth creation, assuming you have years, perhaps decades, until retirement.
Dividend stocks you can stick with
Investors have a softened demand for Canadian bank stocks in a looming recession. This provides an opportunity for you to buy them at cheaper long-term valuations and juicier yields for bigger dividend income.
Dividend income is taxed at a more favourable income tax rate than your job’s income. So, it makes good sense to invest long-term capital into solid dividend stocks. Of course, if you have room in tax-advantaged accounts like TFSAs or RRSPs, you can also invest there for tax-free or tax-deferred income.
One big Canadian bank stock I’m eyeing in this market correction is Toronto-Dominion Bank (TSX: TD)(NYSE: TD) stock. Much like the other big Canadian banks, it has its core business in Canada. But it also provides meaningful exposure to the U.S. economy, which could potentially recover sooner from a looming recession given the U.S. stock market seems to be a little ahead of us — already in a bear market that’s down +20% from a peak.
Additionally, TD Bank’s primary exposure in retail banking is lower risk, which is why the market commands from it a higher valuation of about 10.2 times earnings and a lower yield of about 4.3% versus Bank of Montreal’s price-to-earnings ratio of 9.3 and dividend yield of close to 4.5%.
Both stocks will do fine in the long run and are solid buys in this market correction, but TD is a lower-risk play. After buying shares at discounted prices, new investors can start earning passive income and watch them grow in the long run.
Looking for greater growth?
A quality tech stock, growth name new investors can consider is Constellation Software (TSX: CSU). Unlike a whole bunch of other tech companies, Constellation Software actual has earnings. In fact, the tech company is so incredible that it has been one of the best-performing stocks on the TSX!
Its five-year total returns are approximately 26% per year, essentially tripling an initial investment! In other words, it roughly doubled investors’ money in about 2.8 years.
Constellation Software is a wonderful buy in this market correction. The stock appears “expensive” at about $1,922 per share at writing. However, that’s about 31.6 times earnings versus its estimated earnings-per-share growth rate of close to 22% annually over the next three to five years. So, that’s a reasonable PEG ratio of about 1.4 for a quality business.
Trading platforms like Wealthsimple makes it easy for new investors to start investing by buying partial shares and invest less than $1,922.
