This year, the Tax-Free Savings Account (TFSA) contribution limit is $6,500, an extra $500 from the regular contribution limit. Now is a golden opportunity to invest, as the stock market is going through frequent bearish moments due to interest rate decisions. You can make the most of this market volatility by investing $500/month or $1,000 bi-monthly, during bear moments.
Three stocks to buy from your $6,500 TFSA contribution
When choosing TFSA stocks, look for those with high growth and high yield. The TFSA allows you to grow your investments and withdraw them tax free. Also, diversify your investments across different sectors and company sizes. Large-cap stocks tend to have stable growth. Mid- and small-cap stocks have the potential for high growth but also have higher risk, especially in a weak economy. A combination of the three can enhance your returns and mitigate the risk.
I would buy a large-cap dividend stock like BCE (TSX:BCE) to secure minimum returns, even in a recession. The telecom giant operates in an oligopoly market, where competitors have a good understanding. None of them enters a price war, as they need adequate subscription money to fund the expensive 5G infrastructure rollout. Moreover, their rates are not regulated, which means they can transfer the cost to consumers with a marginal increase in price.
Stable profit margins give BCE the flexibility to give higher dividend payouts in some years and then resume to target a 60-70% payout ratio. The company has been growing its dividend at a 5% average annual rate for over 12 years and has an average dividend yield of 6%.
You can enhance your returns from BCE through its dividend-reinvestment plan (DRIP). In DRIP, the company reinvests the dividend money to buy its shares at a discounted price without any commission or administrative charges. I suggest opting for the BCE DRIP through the TFSA, as dividends are taxable, even if you reinvest that amount. But when you reinvest from TFSA, no dividend tax applies, and you can compound your returns.
BCE stock hovers between $57 and $65. You can consider investing $500 every two months in BCE when the stock falls below $60.
Descartes Systems (TSX:DSG) is a mid-cap growth stock from the tech sector. Being a mid-cap, it has higher growth potential, but the nature of its service makes it resilient to macro events. Descartes provides supply chain management solutions to companies that want to transit goods and services, either on consignment or a fleet. It has a vast customer base from airlines to energy to e-commerce.
The nature of its business puts it in a sweet spot, as its solutions are in demand when trade is strong or when the supply chain is disrupted. For instance, its e-commerce solutions picked up during the pandemic, regulatory solutions during Brexit, and global trade intelligence solutions during the Russia-Ukraine war in fiscal 2023. Hence, any dip in the stock price is a buying opportunity, as the stock is reacting to the market sentiments and not company fundamentals.
You can consider investing up to $2,500 in Descartes stock over the next few months whenever the stock price falls below $100. It has the potential to grow 15-20% annually in the long term, as e-commerce volumes pick up and supply chain issues begin to ease.
If you are willing to walk against the tide and take risks, a small-cap growth stock like Bombardier (TSX:BBD.B) is a good contrarian buy. It has been on a turnaround frenzy since Eric Martel took the helm in 2020 and set the debt-laden business jet maker on the path to revival.
Time and again, weak market sentiment pulls down the stock, as the business jet business is not resilient. The demand might get affected by macro events. But the jet maker will realize revenue from the after-market service centres it built across various countries in 2022. Now is a good time to buy this stock, as it trades 22% below its March peak.