The introduction of the Canadian Tax-Free Savings Account (TFSA) in 2009 marked a monumental liberating event. For the first time ever, Canadians could legally earn and keep all their interest, dividend income, and capital gains without sharing with the government through annual taxes. Simply put, the TFSA is a retirement planning tool Canadians can use to secure their financial future, build a sizeable retirement nest egg, and engineer financial freedom at a faster pace, free from tax drag.
That said, the TFSA is also a two-edged sword. Investors don’t pay taxes on gains, nor can they claim any tax losses. All the gains you make in a TFSA are 100% yours to keep – and so are the investment losses, too. Investors can’t share the burden of TFSA investment losses with the Canadian Revenue Agency (CRA). They should be extra careful about what assets and asset classes to add to TFSA accounts. Tax loss harvesting won’t work here. The CRA won’t absorb a portion of your losses in this “liberated” investment account.
Diversifying your portfolio holdings across several stocks and asset classes should minimize wealth risks, too. Let’s take a look at two TFSA stocks that may add resilience to your retirement portfolio.
Buy REITs in a TFSA for ultimate tax efficiency, and juicy yields
Canadian real estate investment trusts (REITs) offer high passive income yields from diversified real estate portfolios. REITs can be the ultimate source of tax efficiency because they are exempt from income taxes at the trust level, and investors can avoid personal income taxes altogether by stashing REITs in TFSA accounts.
Publicly traded real estate is selling cheaply in 2023. This could be the best time to buy REITs with highly sought properties and well-covered distributions.
CT Real Estate Investment Trust (TSX:CRT.UN) is one of my favourite REIT plays to check out right now. It holds a portfolio of 370 fully occupied properties predominantly leased to Canadian Tire Corp, a well-established, profitable retail giant with an investment-grade credit rating. CT REIT’s current monthly distribution yields 5.8% annually, and the trust has raised distributions every year since going public in 2013.
Units have tumbled as real estate prices weakened and net asset values dropped since 2022. However, property values tend to go up over long-term periods. Buying low valued real estate is a good idea right now.
CT REIT’s distributions look safe given an industry-best low payout rate of adjusted funds from operations (AFFO) of 73.8% during the first quarter of 2023. New development projects are underway to boost rental revenue and net operating income growth in the future.
CT REIT could pay TFSA investors growing distributions for a very long time.
Buy defensive Waste Connections stock for a secure retirement
Defensive investments can protect the value of your nest egg during tough economic times, and Waste Connections (TSX:WCN) stock is a tried-and-tested all-weather stock that retained its valuation during a market drop in 2020. Households and businesses will continue to produce solid waste during an investor’s retirement, and rich cash flows will continue to flow to waste management businesses.
Waste Connections reported 15.4% year-over-year growth of first-quarter 2023 revenue to $1.9 billion and generated $274 million in free cash flow during the first three months of this year. Free cash flow is the lifeblood the $43-billion waste management giant needs to sustain its acquisitions-led growth spree in the near term.
Looking ahead, Waste Connections’ cash-rich business and growing operations may enable the company to significantly grow dividends to shareholders as the business matures.
A forward market capitalization to free cash flow (MC/FCF) multiple of 28 makes WCN stock look cheap when compared to its competitor Waste Management’s multiple of 41 today. You will pay 28 times Waste Connections’ next-twelve-months’ free cash flow to buy the whole company today, instead of 41 times free cash flow if you buy Waste Management stock instead.
WCN stock has generated nearly 530% in total shareholder returns over the past decade and outperformed the TSX’s 122% total return over the same period. Momentum has remained positive over a long period.
Past performance doesn’t predict future returns. However, Waste Connections has a solid-performing, defensive business that I’d be comfortable owning for decades in a TFSA retirement portfolio.
