The First Home Savings Account (FHSA) is a new registered plan that allows Canadians to save up for their first home. It has a lifetime contribution amount of $40,000. You can contribute up to $8,000 a year, as soon as you open an account. Any unused room can be carried forward into future years.
There are different ways to build your FHSA, depending on how conservative of an investor you are. If you are a higher-risk investor and can endure greater volatility, here are some of the best Canadian stocks you can invest in your FHSA.
Big Canadian banks
The big Canadian bank stocks are likely to be pressured in the near term, as economists forecast a recession to occur this year in Canada and the United States. At least, economists believe it would be a mild recession. Nonetheless, the banks have to increase their reserves in preparation for a higher percentage and higher amounts of bad loans, which, in turn, cuts into their short-term earnings.
The heightened risk in the near term presents a good opportunity to buy the big Canadian bank stocks at discounts versus their long-term valuation. For instance, at about $115 per share at writing, Bank of Montreal (TSX:BMO) offers a boosted dividend yield of 5.1% from a lower stock price (down +15% in the last 12 months) and a recent dividend hike of 2.8%.
The big bank’s dividend has good coverage. Because of the recessionary scenario, its payout ratio may spike to about 78% this year. However, long-term investors should be reassured that it should be temporary. Based on normalized earnings, its payout ratio would be healthy at approximately 46%.
The stock is on sale with a discount of more or less 20% from its long-term normal valuation. So, it has the potential to deliver total returns of 10-14% per year over the next three to five years. That would be a very solid return in a blue-chip stock.
Utility stocks could also be reliable to help you build a larger down payment in your FHSA. For example, Brookfield Infrastructure Partners (TSX:BIP.UN) has been an outperformer in the utility sector. It provides excellent diversification across high-quality assets spanning 40 businesses in 15 countries. Its assets include transport, midstream, utility, and data infrastructure.
Recently, the company posted distinguished funds-from-operations-per-unit (FFOPU) growth of 12% in the first quarter. It also secured a couple of acquisitions: a large-scale European data centre platform, which operates in France, Italy, Spain, Poland, and Germany, and the largest owner and lessor of intermodal shipping containers — a critical provider of global transport logistics infrastructure. Consequently, Brookfield Infrastructure has achieved its capital deployment goal for the year.
Long term, the company targets rates of returns of 12-15% for its investments, driven by FFOPU growth of north of 10%, which will lead to cash distribution growth of 5-9% per year. At about $49 per unit, analysts believe the stock is undervalued by about 19%. The reliable business also offers a cash distribution yield of about 4.2%.
The super conservative FHSA investor would get interest income (e.g., from Guaranteed Investment Certificates) for interest income of about 5% and guaranteed return of their principal. Otherwise, more aggressive Canadian investors can take more risk for potentially higher returns by investing in solid dividend stocks. For this strategy, you should have at least a five-year investment horizon. Look for dividend stocks with decent dividend yields and sustainable, quality dividend growth. These are lower risk than low- to no-yield stocks.