Your Tax-Free Savings Account (TFSA) offers tax-free returns, given you don’t day trade for hefty returns in the account or buy foreign dividend stocks (Any withholding tax on the foreign dividends would not be recoverable.).
Getting back to the point, because your TFSA provides tax-free returns, you might naturally want to target outsized total returns. If that’s the case, you can consider beaten-down, undervalued stocks that could do much better in another type of environment. Ideally, you should be compensated with some sort of income for holding the investments, while you wait patiently for price appreciation.
Here are a couple of top Canadian stocks to consider.
NorthWest Healthcare Properties REIT
Higher interest rates have been bullying many real estate investment trusts (REITs), including NorthWest Healthcare Properties REIT (TSX:NWH.UN), which innately have a lot of debt on their balance sheets. In particular, the market seems to have sold off NWH.UN past the point that’s making it potentially too cheap to ignore.
The global healthcare REIT consists of a diversified portfolio of 233 properties. This stable portfolio has a high occupancy of about 96.6% and weighted average lease expiry of just north of 13 years. It has more than 70% exposure to gateway cities, such as Toronto, Sydney, London, Phoenix, and Berlin. In the respective geographies, the REIT has partnered with local leading operators. Its asset mix is primarily about 63% in hospitals and healthcare facilities and 35% in medical office buildings.
The company last reported total debt of $3.9 billion, which is higher than management’s preference. It targets to reduce its total debt to about $2.5 billion and lower its weighted average interest rate from approximately 4.7% to 4%.
At $7.70 per unit at writing, the REIT offers a crazily high cash distribution yield of almost 10.4%. The high yield is alarming. Notably, its retained earnings shrank to below $83.3 million last quarter from over $229 million in the prior quarter. These metrics signal that it could potentially cut its cash distribution.
Even if the REIT were to cut its distribution by half, investors would still pocket a cash distribution yield of about 5.2%. And from current levels, the stock could still be a good total return investment. The stock price returning to its net asset value would mean upside of almost 71%. Analysts have a more conservative 12-month consensus price target that represents near-term price appreciation prospects of 36%.
Magna International stock
Global auto part manufacturer Magna International (TSX: MG) is a cyclical stock that could have explosive growth in an environment of expanding economies and bull markets.
At $74.31 per share, it trades at a reasonable multiple of about 12.4 times blended earnings for its double-digit earnings growth prospects. Notably, the stock is known to have above-average volatility. For your patience, the dividend stock offers a dividend yield of about 3.3%.
Longer term, the stock could revisit its peak of about $125 for 68% upside. Shorter term, analysts have a 12-month consensus price target of $86.42. This implies upside potential of 16% in the near term, which is not bad.
By taking greater risk and a more active approach to investing, investors might be able to build greater wealth in their TFSAs.
