The First Home Savings Account (FHSA) is now available to help Canadians buy their first home. You can contribute up to $8,000 per year in your FHSA, but the lifetime contribution amount is $40,000. So, the quickest way to hit that limit is to contribute $8,000 annually for five years. If you’re not in a hurry to buy your home, you can allow your investments to compound longer to build a bigger down payment. You can keep the account open for up to 15 years before you use the saved-up amount towards the purchase of your home.
Let’s assume your FHSA has an investment horizon of five to 15 years. To maximize your FHSA potential, you can target for higher returns by investing in stocks instead of lower-risk bonds or Guaranteed Investment Certificates (GICs). Currently, the best one-year GIC rate is about 5.5%.
Enbridge stock
You can get higher income from Enbridge (TSX:ENB) stock right now, which offers a dividend yield of about 7.6%. As the largest North American energy infrastructure company, it requires substantial capital investments to maintain and grow its network, so there’s a barrier to entry for new entrants. From 2019 to 2022, 61% of Enbridge’s operating cash flows went to its capital investments, which totalled over $24 billion!
Higher interest rates have led to a higher cost of capital for the company. This and its high debt levels have triggered a correction in the stock, resulting in a more attractive dividend for investors. Between the end of 2019 and the end of the last reported quarter, Enbridge’s debt-to-equity ratio jumped from 1.4 times to 1.8 times, and its debt-to-asset ratio jumped from 57% to 63%. Also, compared to 2019, its interest expense has increased by approximately 18% to $3.2 billion in the trailing 12 months.
The company has paid dividends for about 70 years. It is a Canadian Dividend Aristocrat that has increased its dividend for about 27 years. Through 2025, it could increase its dividend by about 3% per year. So, the estimated total return is north of 10%, with the conservative assumption that it would not experience any valuation expansion. After 2025, it has the potential to bump up its dividend growth to about 4%.
In reality, based on the recent quotation of $46.83 per share, analysts believe the stock is undervalued by about 18%. So, it can potentially deliver returns of 10-15% over the next five years, especially if we see a decline in interest rates.
TD Bank stock
Another dividend stock you can consider for your FHSA is Toronto-Dominion Bank (TSX:TD) stock. Its recent stock performance has been weak because of higher loan loss provisions due to a higher probability of an upcoming recession.
TD Total Return Level data by YCharts
The large North American bank has been an outperformer in the long run. For example, the 10-year graph above illustrates its return versus some benchmarks. In the past 10 fiscal years, the quality bank increased its adjusted earnings per share (EPS) at a compound annual growth rate of almost 8.5%.
Investors can take advantage of the weakness by buying shares at a dividend yield of almost 4.6%. At $84.21 per share at writing, TD stock trades at a discount of about 14% from its long-term normal valuation. Notably, its medium-term adjusted EPS growth rate target of at least 7% would suggest returns potential of 10-15% per year over the next five years.
Investor takeaway
Investing in stocks is riskier than investing in fixed-income investments. However, you could earn greater returns from stocks. To improve the reliability of your FHSA returns, you can rely less on price appreciation and more on safe dividends. Look for stocks with quality businesses that pay decent dividend yields at a good valuation.
If you contribute $8,000 per year at the start of the year over the next five years and earn a 10% return every year over the next 15 years, your FHSA would arrive at $139,348 at the end of the period.
