When it comes to savings and wealth creation, the Tax-Free Savings Account (TFSA) emerges as a handy tool. As one could save and invest in a TFSA without paying taxes on interest or capital gains, it significantly enhances the real return, especially in the long term. Thus, despite the short-term macro headwinds, one should leverage the $6,500 annual TFSA contribution limit for 2023 and invest in stocks for long-term financial goals.
Against this background, I’ll discuss two fundamentally strong Canadian stocks with the potential to generate solid capital gains and regular dividend income. Let’s begin.
Energy infrastructure company Enbridge (TSX:ENB) is a must-have in your TFSA portfolio for reliable dividend income and steady growth. The company transports oil and gas and plays an important role in the energy value chain, which leads to the high utilization of its assets and drives its earnings and dividend payments.
This large-cap company continues to invest in conventional and low-carbon projects, which positions it well to capture strong energy demand. Further, Enbridge is top dividend-paying stock and is a Dividend Aristocrat. It has paid a dividend for 68 years and increased it for 28 consecutive years.
Enbridge’s 40 diverse sources of revenue, long-term contracts with arrangements to reduce price and volume risks, high utilization rate, and two-pronged growth strategy (investments in conventional pipeline and green energy) position it well to deliver solid returns in the coming years.
In addition, its multi-billion-dollar secured projects, inflation-protected adjusted earnings before interest, taxes, depreciation, and amortization), and revenue escalators will likely support its growth.
Enbridge stock pays an annual dividend of $3.55 a share, translating into an attractive yield of 6.73% (based on its closing price of $52.77 on April 10). Meanwhile, its target payout ratio of 60-70% is well covered and sustainable in the long term.
goeasy (TSX:GSY) is undeniably a solid stock for generating stellar capital gains while earning reliable dividend income. This subprime lender provides secured and unsecured loans and has delivered strong capital gains for its investors. For instance, goeasy stock has appreciated by about 1,117% in the past decade, reflecting an average annualized return of more than 28%. In addition, this financial services company enhanced its shareholders’ returns through higher dividend payments.
It’s worth highlighting that goeasy is included in the S&P/TSX Canadian Dividend Aristocrats Index.
Its revenue has grown at a CAGR of 20% in the last five years. Moreover, its five-year EPS (earnings per share) CAGR stands at an impressive 27%.
Its multi-product (like auto financing and home equity lending) and multi-channel strategy augur well for growth, driving its revenue and earnings higher. Notably, goeasy’s top and bottom lines have increased at a compound annual growth rate of 20% and 27%, respectively, in the last five years.
Looking ahead, higher loan originations and a large subprime lending market will drive its consumer loan portfolio and revenues. At the same time, high-quality originations, strong credit quality, stable loan loss provision rates, and tight expense management will drive its efficiency ratio and, in turn, its bottom line.
goeasy stock is trading at a discount from its highs, providing TFSA investors with a solid buying opportunity.