In case you haven’t heard, eligible Canadians will have $6,500 in room to contribute to their Tax-Free Savings Account (TFSA) this year. Indeed, it’s likely that many Canadians haven’t yet contributed and put the money to work yet. With bond yields at respectable levels and GICs (Guaranteed Investment Certificates) now offering more than 4% in annual interest, there’s quite a bit of competition for your next TFSA investment dollar.
I’m not against reaching for the safe 4-5% yields right here with GICs. They’re arguably a great deal, as rates look to peak and central banks begin to pause, perhaps opening the door to rate cuts down the road. Though GICs are compelling, so too are many stocks within some of the harder-hit areas of the market.
It’s a good time to be a TFSA investor
Simply put, it’s a great time to be a TFSA investor, especially compared to last year!
Stocks multiples, on average, are lower, opening to door to higher prospective returns on a relative basis. And risk-free investments are the most bountiful they’ve been in a very long time!
It’s hard to argue against owning both. If you’re a younger investor with at least 10 years to commit to your investments, I’d have to tilt the odds in favour of stocks. Now, a 4% safe yield is great, but with inflation where it is (in the 5% range), you may still obtain a negative real return (or return after inflation).
Young TFSA investors need to build their wealth over time, rather than just staying afloat. For these young investors, I think they can do better if they choose carefully which stocks to pick at.
Currently, I like Alimentation Couche-Tard (TSX:ATD) and Scotiabank (TSX:BNS).
Alimentation Couche-Tard
Shares of Couche-Tard rocketed to hit a new all-time high on Thursday of $67 and change. It was an upbeat day for markets, and though Couche-Tard has been a market crusher over the past two years, surging from $41 and change to nearly $68, or a 64.15% gain, I still view shares as cheap.
The stock goes for 17.7 times trailing price to earnings. Sure, Couche is pricier than it’s been all year. However, I think many investors are catching on to the company that continues to drive earnings higher amid turbulent macro conditions.
Inflation and recession headwinds aren’t necessarily good for Couche. But management’s actions have helped the company stand out from the crowd. With a new acquisition in hand (TotalEnergies European assets), I think Couche-Tard will be busy integrating, driving value, and giving fuel for the stock to move to much higher levels.
Yes, momentum chasing can be bad. But with such strong fundamentals and a modest teens price-to-earnings multiple, I’d argue the stock is more than deserving of its rally. In fact, I think more gains could be had from here, as the brilliant management continues to execute effectively.
Scotiabank
The banks have been punched in the gut these past few weeks. Though Scotia’s U.S.-heavy peers took the brunt of the damage, BNS stock still sunk and flirted with 52-week lows of around $64 per share. I think the punishment was overdone. Scotiabank stock trades at 9.36 times trailing price to earnings with a 6.18% dividend yield.
Further, the company grants exposure to growthier emerging markets. Longer term, I think Scotiabank’s international presence could help it move above the pack.
For now, investors are sour on banks and emerging markets in the face of a recession. If you’re willing to brave the recent plunge, I’m a big fan of the value to be had.
