You Can Put $6,500 to Work in Your TFSA: Where to Invest in 2023

The macro outlook looks gloomy. It may be a good idea to invest in defensive dividend stocks — even for long-term capital — in your TFSA.

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The additional amount of room you get for your Tax-Free Savings Account (TFSA) increases over time by inflation on increments of $500. Finally, after staying at $6,000 for four years since 2019, the TFSA contribution room increased to $6,500 this year.

If you maxed out your TFSA in previous years, know that you have new room of $6,500 in 2023. The fun begins! Where should you invest?

Where to invest for short-term financial goals

You can pick stocks wisely, but where you ultimately invest should depend on your savings goal for this capital. If the amount is meant for short-term savings, such as for a vacation or the purchase of a car within three years, parking money in fixed-income investments, such as a 5% interest rate Guaranteed Investment Certificate (GIC), is a safe bet.

You can potentially get higher returns by investing in market-linked GICs, which also protect your principal like traditional GICs. Market-linked GIC returns are also considered interest income.

You might also get decent short-term returns from corporate bonds. To be secure, you should pick ones that mature at or before the date you need your money back. Like GICs, bonds also pay out interest income.

Since interest income is taxed at your marginal tax rate in non-registered accounts, it might hold them in your TFSA to pay zero taxes on them.

Where to invest in for long-term financial goals

For long-term investments of five years or even longer, you can consider value stocks that pay good dividends or even growth stocks, depending on your risk tolerance and investment knowledge. Generally, dividend stocks are lower-risk investments.

By investing in stocks, you could pocket massive tax savings from materialized capital gains. And, of course, any tax-free dividend income you receive adds up as well. That said, eligible Canadian dividends received from dividend stocks are favourably taxed in non-registered accounts. So, some investors opt to hold these dividend stocks in their taxable accounts instead of in their TFSAs.

One dividend stock to consider for your TFSA

Given many economists predict a recession (though a mild one) this year, it may be smart to pick defensive high-yield dividend stocks for some of your TFSA money. For instance, at $53.30 per share at writing, TC Energy (TSX:TRP) stock is undervalued and yields 6.75%.

Specifically, 20 analysts have a 12-month consensus price target of $64.85 on the stock, which represents near-term upside potential of almost 22%. TRP stock has increased its dividend for about two decades. Although its three-year dividend-growth rate is 8%, management anticipates a lower dividend-growth rate of 3-5% over the next few years.

Let’s be conservative and assume a 3% growth rate, a 6.75% current yield, and it takes five years for the valuation expansion to occur. Based on these assumptions, the high-yield dividend stock’s approximated annualized returns over the next five years is about 13.75%.

The Foolish investor takeaway

Where you invest your TFSA money in 2023 depends on what you plan to do with that money. If your savings goals are short term, go for lower-risk, fixed-income investments such as GICs and bonds.

If you have capital intended for long-term investment, may be even for your retirement, quality dividend stocks could do wonders in helping you build wealth for the long haul!

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 Kay Ng has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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