Your Tax-Free Savings Account (TFSA) room is precious, because the money you earn inside is tax free. However, it can also be a double-edged sword. If you lose money inside, you won’t be able to use the losses to offset capital gains to reduce your capital gains tax.
If you have lost money in your TFSA, the only way to guarantee stop losing money is by putting your money in risk-free investments like traditional Guaranteed Investment Certificates (GICs) and high-interest savings accounts. You can earn interest income from them without risking your hard-earned money.
At writing, the best one-year GIC rate is 5.5%, which is not bad for an investment that won’t lose your original money. Recall that interest income is taxed at your marginal tax rate, so it may be logical to earn interest income via GICs in your TFSA, where it’s unreachable by the taxman.
Investing your TFSA for higher returns
Bond and stock investing could potentially result in higher returns. Simultaneously, it means investments will be taking on greater risk, which could result in losses.
Bond prices have an inverse relationship with the change in interest rates. Bond prices fall as interest rates rise. So, when you invest in bonds, you’re guessing where interest rates may head next. Bonds may also be a part of your long-term diversified portfolio. Here are some top Canadian bond exchange-traded funds you can check out.
To prevent losing money from stock investing, you can explore solid dividend stocks, aim to buy at discounted valuations, and have a long-term investment horizon to allow you to ride through volatility. Investing skills and psychological quality come into play when you invest. For example, you might pick stocks wisely by choosing wonderful businesses at good valuations and have the ability to ride through or even buy more during bear markets. In the long run, the stock market goes up. So, a well-built basket of quality stocks across a diversified portfolio should rise in value over time.
An example of a wonderful business
Dollarama (TSX:DOL) is a wonderful business that is likely to do well through the economic cycle. Even during recessions, many consumers prefer to shop at the dollar store chain for its lower-priced items. The company is incredibly well run, with high margins and returns. For example, its recent net margin was 15.9%. And its five-year return on assets was 18.6%.
It does have high debt levels and scores an investment-grade S&P credit rating of BBB. However, it is a massive free cash flow generator. In the past four fiscal years, it used only about 18% of its operating cash flow for capital investment.
For example, in the past fiscal year, it generated $712.2 million of free cash flow. So, its free cash flow payout ratio was only 9%. Therefore, it has been able to increase its dividend at a healthy pace. It is a Canadian Dividend Aristocrat with a 10-year dividend-growth rate of about 11.9%.
Dollarama is a great business to invest in. Unfortunately, there’s little margin of safety in the stock at $89.61 per share. Interested investors should look for a pullback to purchase shares for long-term investment in their TFSA, potentially in a recession where the stock price could fall, even when the business is resilient.
