The First Home Savings Account (FHSA) is a new account that could provide significant tax-free savings for Canadians looking to buy a home. Eligible Canadians can contribute up to $8,000 per year with a maximum lifetime contribution of $40,000. The account can stay open for 15 years. So, you can build up a serious down payment with the time available for compounding your money.
Below, I’ll introduce where you might invest your FHSA contributions.
Cash investments or GICs
Since 2022, the Bank of Canada has increased the policy interest rate, and Canadian investors can now get higher interest rates on risk-free investments like Guaranteed Investment Certificates (GICs). The traditional GICs allow you to lock in your money for a specific interest rate. For example, you should be able to find one-year GICs that provide interest income of 5.0 to 5.95% and guarantee the return of your principal.
A newer type of GIC is market-linked or equity-linked. Essentially, this type provides a return that’s a percentage of the market return while guaranteeing to return your principal. The returns from this type are more unpredictable.
If you need greater liquidity, you can also put your money in high-interest savings accounts or money market funds like Horizons High Interest Savings ETF that provide decent cash distributions and have little sensitivity to change in interest rates. In August, this exchange-traded fund (ETF) offered a gross cash distribution yield of close to 5.4%.
Preferred shares
Preferred shares are riskier investments that provide income. They are more sensitive to the change in interest rates than money market funds. Typically, higher-quality preferred stocks offer smaller dividend yields. When a publicly traded Canadian company offers dividends for both its preferred stocks and common stock, preferred stockholders would get paid dividends prior to the common stockholders. In this sense, preferred stocks are safer income investments than common stocks that pay dividends.
Dividend stocks
If you have a greater appetite for risk, you can consider putting some of your FHSA in dividend stocks to potentially get higher returns. For example, Fortis (TSX:FTS) has one of the longest dividend-growth streaks on the TSX. It has increased its common stock dividend for about 49 years. And it has room to continue increasing its dividend. Specifically, management targets dividend growth of 4-6% per year through 2027.
The regulated electric and gas utility is diversified across 10 utilities. It also has 93% of transmission and distribution assets that provide essential services. So, it translates to relatively predictable business performance through economic cycles, driving a low-risk, defensive stock.
The stock hit above $60 per share earlier this year. After pulling back to $53.95 at writing, investors can pick up shares for a dividend yield of close to 4.2%. Based on these levels, investors could get total returns of about 9-10% per year over the next few years.
Depending on your risk tolerance and when you plan to make the jump to buy your home, you might stick with low-risk investments like GICs for shorter-term investing or invest in a mix of what was discussed if you have a long-term investment horizon.
