Now seems like a decent time for long-term passive income investors to go above and beyond the rates offered by risk-free assets (in the 4–5% range these days). Indeed, some folks may be asking themselves why bother taking risks when a high-rate, risk-free asset is good enough.
Depending on your personal risk tolerance, it may make sense to stick with risk-free assets. I’m not against owning them as part of a diversified income portfolio. That said, I do think the higher yields offered by certain securities balance out the risks such that the risk/reward may actually be better than that of risk-free assets.
Inflation seems to be getting under control, with the rate falling below 4% in Canada. Though inflation seems to be on a trajectory back to normal levels, it’s worth remembering that high inflation can have the potential to be very sticky. If inflation above 3% sticks around for a while longer, those 4–5%-rate risk-free assets may not be the no-brainer buy they seem to be today, especially if the bull continues going strong!
TFSA investors: Some risks are more than worth taking!
In any case, I do think it’s worth taking the risk for a shot at more reward if you’re willing to put in the homework to ensure the odds are on your side. I’m all about doing better than the market averages. And better than what a risk-free asset can provide at any given instance.
Indeed, over the long term, it’s stocks that tend to outdo most other asset classes. So, if you’re in it for the next few decades, it makes sense to pursue some of the high-yielding opportunities for your TFSA today.
Without further ado, let’s look at one of the most interesting TFSA investment ideas that may be worth keeping on some sort of watchlist going into the summer season:
My TFSA income pick for July 2023: National Bank of Canada
National Bank of Canada (TSX: NA) isn’t the highest-yielding bank, nor is it the cheapest from a trailing price-to-earnings (P/E) standpoint. Further, the stock isn’t even off that much from its all-time highs, as some of its peers in the Big Six are in deep bear market territory (that implies shares off 20% or more from peak levels).
Undoubtedly, shares of National Bank of Canada may not seem like the most obvious TFSA investment idea for those targeting the bank stocks as buys on weakness. That said, I think it’s hard to deny National Bank’s impressive performance amid macro challenges.
The stock is off just 7.5% from its high of $105 and change. I think National Bank deserves consideration over its bigger brothers. In the banking world, bigger is not necessarily better. Arguably, National Bank is in a sweet spot, with a “large enough” $33 billion market cap, as it looks to catch up with its Big Six brothers.
Further, the bank has outperformed its peers over the past year, with 12.2% gains, while its peer group is likely down over the timespan. Laurent Ferreria deserves credit for National Bank’s performance. And as recession finally does hit, I’d look for National Bank to continue to have a lot to prove.
What about valuation?
It’s a worthy member of the Big Six, if not the best member, in my opinion. At 10.5 times trailing price-to-earnings, with a 4.18% dividend yield, NA is a terrific addition to any long-term-focused TFSA that seeks the perfect combo of yield and capital gains potential.
