Investors sometimes find themselves with unexpected cash they can put to work in their self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). The money could be from a bonus at work, a lucky scratch ticket, or even from selling the old camper that has been sitting in the yard for the past 10 years.
Regardless of the source, there is a great opportunity right now for investors to get attractive returns from both Guaranteed Investment Certificates (GICs) and top TSX dividend stocks.
Are GICs or dividend stocks better to buy?
The surge in interest rates over the past 18 months is causing grief for anyone with variable-rate debt or fixed-rate loans that need to be renewed. The upside of the steep rate hikes by the Bank of Canada in its fight against inflation is that rates paid by financial institutions to borrow money from savers have gone up considerably.
At the time of writing, GICs offered from Canada Deposit Insurance Corporation (CDIC) members pay more than 5% for longer-term GICs and more than 5.5% for GICs that are terms of one or two years. This is a decent return, especially now that inflation is back down to 4% and likely headed lower over the course of the next year.
GICs are risk-free as long as they are issued by a CDIC member and are within the $100,000 limit. The downside is that the money is locked up for the term, and the rate is fixed.
Dividend stocks offer more flexibility. Investors can sell the shares at any time if they need to access the invested fund. Top dividend stocks typically increase the dividends every year, so the yield on the initial investment rises with each dividend hike. The downside is that share prices can fall below the purchase price, and dividends can be cut or eliminated if a company gets into financial trouble. That being said, great Canadian dividend-growth stocks usually rebound from market corrections, but it can take time for the share price to recover to the purchase price, depending on the entry point and the extent of the pullback.
Stocks to consider today
Over the past year, the jump in interest rates has had a negative impact on share prices. At current levels, many leading TSX dividend stocks look cheap and offer attractive yields that are above the best GIC rates.
For example, Enbridge (TSX:ENB) trades near $45 per share at the time of writing compared to $59 at the high point in 2022.
The company has increased its dividend annually for 28 years and expects to generate steady earnings growth over the medium term. At the time of writing, ENB stock provides a 7.9% dividend yield.
BCE (TSX:BCE) is another great dividend stock that is out of favour. The communications giant trades near $51.50 at the time of writing compared to $65 in May. The drop appears overdone, considering the essential nature of the core mobile and internet services businesses. BCE raised its dividend by at least 5% in each of the past 15 years. The current yield is 7.5%.
As soon as the Bank of Canada ends its cycle of rate hikes, there could be a big rally in the share prices of top dividend stocks.
How to invest $10,000?
In the current market conditions, I would probably split the investment between GICs and high-yield stocks like Enbridge and BCE. This reduces risk while still delivering a very attractive average yield that could easily top 6% today.
