The Tax-Free Savings Account (TFSA) is a sure-fire way of creating long-term income. But there is just one tiny detail that many investors may have forgotten.
You actually have to invest in it.
While the TFSA could certainly be used as a way just to store your cash, it’s not the reason it was created. Instead, that reason was to put cash aside and invest in the Canadian economy, with the ability to take it out at any point.
If you’re sitting on that $6,500 contribution and just watching the market go up and down, stop right now. Instead, consider these two options.
Invest in a dividend stock
A top choice for investors would be to consider a dividend stock that could most certainly rebound in the near future. This would mean identifying sectors that perhaps are trading downwards now but are due for a recovery — and quickly.
One of the best places to look is in the banking industry. Financial stocks tend not to do so well during economic downturns, which we’ve seen with the Big Six banks. They fall as interest rates rise, with provisions for loan losses coming into use. The current environment has been especially difficult, as the banks also had to use these provisions during the pandemic.
Even so, this makes a dividend stock in the banking industry a great choice for your TFSA. You can grab a higher dividend yield at a great price and watch it recover thanks to the oligopoly of Canadian banking institutions.
One of the best choices right now would be Bank of Montreal (TSX: BMO). BMO stock managed to sneak in and make a large investment in the United States in recent years through the Bank of the West. This allowed it to diversify and create a brand-new revenue stream, which has helped during this downturn.
Yet shares of BMO stock are still down this year by 1.77%, yet they’ve risen 3.71% in the last month. So, there is little time to lock up a dividend yield of 4.8%, which is higher than the 4.14% five-year average.
Keep it simple with an ETF
If you’re nervous about investing a larger amount in one stock, I don’t blame you. While it’s important to mention that banking institutions invest in a large bumber of sectors as well, you can invest in those sectors directly through an exchange-traded fund (ETF).
In fact, investing in an ETF that follows the TSX today is a great way to create long-term income. Over time, the TSX composite goes up. While it might not be by leaps and bounds, it tends to rise at a stable level, offering exposure to every industry.
A great option would be to invest in an ETF that aims to replicate the TSX today, while also offering a dividend and low management fees. One such option to consider is BMO S&P/TSX Capped Composite Index ETF (TSX: ZCN).
This fund provides exposure to the TSX, with a far lower share price at $27.37 as of writing. It also offers a 3.3% dividend yield as of writing, with shares up 1.97% in the last year and 8% in the last nine months! So, you’re getting growth, dividends, and, most importantly, safety.
No matter what option you choose, make sure you’re comfortable with it. Just don’t leave those TFSA funds sitting around. Put them to good use, and you’ll have a lifetime of long-term income.
