With stock markets swooning in both directions this January, Tax-Free Savings Account (TFSA) investors should be ready to take advantage of the dips with their latest $6,500 contribution. Undoubtedly, it takes a lot of courage to go against the grain after a year of feeling the pain in one’s portfolio. Still, the risk/reward scenario is good after one of the worst market years since the Great Financial Crisis.
Even after the ugliest bear markets, bulls are ready to run. And TFSA investors who wait too long to punch their ticket into stocks could miss out on running with the bulls. If you’re a young investor, I’d argue there hasn’t been a more enticing opportunity to put money to work, at least from a long-term perspective.
If you’re looking to deploy fresh capital to work, you don’t want markets to be up!
You want markets to be between a rock and a hard place. That way, you’ll be able to grab more bargains and improve your prospective returns over your long-term horizon.
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TFSA investors shouldn’t doubt the bargains that exist today
Sure, a recession and the earnings destruction it causes is never good. One could argue that such headwinds make today’s seemingly “cheap” multiples warranted. Still, the market pendulum always tends to overswing one way or the other. Today, in the midst of a bear market, I believe it’s swung too much on the bearish side.
Dip buyers have gone into hibernation. But they’ll be back in due time, as the sellers exhaust. Once the recession moves past us, a huge weight will be lifted off our shoulders. And if the Federal Reserve can stay out of the way, there’s no telling how sudden the next bull run could be.
I have no idea when the bear will hibernate again. But I believe that long-term investors will do well by continuing to brave the wreckage, buying incrementally on the way down. Just like in weightlifting, investing is about pain and gain. It’s nearly impossible to gain (over the longer term) without facing some pain. In any case, I see few reasons to delay TFSA purchases until volatility backs off. By then, the best deals will likely be gone.
Passive-income plays that are back in the 2020 gutter
As markets sag lower, yields will creep higher. Find sustainable dividends, and you’ll be able to lock in a generous passive-income stream that can pay you for life. Consider the real estate investment trust (REIT) space. InterRent REIT (TSX:IIP.UN) and Killam Apartment REIT (TSX:KMP.UN) are two well-run residential REITs that stand out as TFSA-worthy plays for value-conscious passive-income investors.
InterRent shares are down around 22% over the past year and around 30% off its highs. Indeed, shares suffered a round trip right back to 2020 lows in 2022. At 6.2 times trailing price to earnings, the Ontario- and Quebec-focused residential REIT with a knack for creating value from acquiring other properties looks like a pretty sweet deal.
Undoubtedly, higher rates are a negative. But just look at the damage that known headwinds have already caused to the share price. At $13 and change per share, I view the growth REIT as a bargain while the yield is at or north of 2.75%.
Killam is another Canadian REIT that’s in free-fall mode. Down 27% over the past year and 30% from its highs, Killam has followed a similar trajectory as InterRent. Still, the east coast residential REIT seems dirt cheap at 9.1 times trailing price to earnings, with its 4.23% yield.
Better buy for TFSA passive income?
You can’t go wrong with either name. For those seeking long-term distribution growth, I prefer InterRent. It’s the cheaper REIT right now. However, higher rates could take a jolt out of its growth moving forward.
