When you are developing your Tax-Free Savings Account, or TFSA, portfolio, it may be a good idea to divide your holdings into a few categories. This may include your core holdings — the ones you are planning on holding long term or even decades.
Other categories may include temporary picks that you are buying simply to take advantage of a bullish trend or undervaluation.
If you are working with just these two categories, it’s a good idea to be more discerning with your core holdings and evaluate them from a long-term perspective. However, if you are lucky, you can find the right long-term core holdings at a heavily discounted price. This may significantly increase the overall return potential of these stocks.
A financial stock
Over the last couple of decades, Mississauga-based goeasy (TSX:GSY) has emerged as one of the most prominent alternative financial companies in Canada.
It started with a simple business model: it provides financing and financial solutions to an underserved market — i.e., people with low/bad credit. It started in 1990, and in the last three decades, it has grown to the size of a small bank, with over 400 locations across the country.
While it has multiple financial products, personal loans are the most significant part of its business model. It also offers lease-to-own financing options to consumers, allowing them to buy things like furniture and appliances. It also caters to commercial clients (merchants) and offers them a range of consumer lending solutions.
The stock has been an amazing grower since its inception, but even if we just stick to the last 10 years, its growth has been exceptional at over 800%. The overall returns are well above 1,000% if we add the dividends.
Right now, the stock is trading at a hefty discount of 41% (from its 2021) peak and is attractive from a valuation perspective as well. The discount has also grown its yield to a decent number (2.9%), and the dividends are backed by a highly sustainable payout ratio (34%). It’s a great pick for a core TFSA holding for both its growth potential and dividends.
An energy stock
TC Energy (TSX:TRP) is currently one of the most heavily discounted energy stocks in Canada. It has lost about a third of its valuation from its Apr 2022 peak. This is contrary to the sector’s performance, which is reflected in the energy index’s gain of over 9% over the same period. It doesn’t make TC Energy dirt cheap per se, but that’s a significant fall for a large-cap, blue-chip company like TC Energy.
While it would have been perceived as a danger sign for most other energy companies, TC Energy has a few advantages that have to be taken into consideration.
The first is its business model. It’s primarily a pipeline company that transports both natural gas and oil/liquids, though it’s planning on divesting its liquid pipeline business. It also has the advantage of scale, as it transports about one-fourth of the natural gas consumed in North America.
The slump has pushed its yield up to 7.4%, which is quite high for an Aristocrat as old as TC Energy and makes it a great dividend pick as well.
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Foolish takeaway
The two stocks can bring two different strengths to your portfolio. goeasy, if it maintains or at least remains close to its growth numbers in the last 10 years, can push your TFSA portfolio to new heights (if you invest a sizable sum).
TC Energy brings the stability of an energy leader and a Dividend Aristocrat as well as decent passive-income potential.
