GICS vs. High-Yield Stocks: What’s the Better Buy for a TFSA?

The TFSA is already a great way to invest for the future, but how should investors create passive income? Through dividends, or fixed income?

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The Tax-Free Savings Account (TFSA) is one of the best ways that Canadians can save for their goals. Not only do you achieve tax-free returns and dividend income, but you can also take it out at any time! So if you go through an emergency, or one of your goals is sooner than retirement, the TFSA is the best option for you.

But what are the best options for a TFSA? Let’s compare two methods of achieving passive income that have been quite popular lately. Those are guaranteed income certificates (GIC) and high-yield dividend stocks.

GICs

The case for GICs is pretty easy to make. GICs offer Canadians fixed income each and every year that you hold them. And right now there continue to be some pretty amazing rates. If you were to hold a GIC for five years, you could pick one up from most of the banks for around 5%!

That means every year, no matter what the market does, you can look forward to your GIC investment making 5%. This allows investors to be content knowing that they will continue to make passive income through their GIC year after year, without the stress of market reactions.

What’s more, you can make a fair amount of income! If you were to put in $5,000, here is how much you could earn after those five years.

YearIncreaseTotal
00%$5,000
15%$5,250
25%$5,512.50
35%$5,788.13
45%$6,077.53
55%$6,381.41

By the end of the fifth year, you’ll have made $1,381.41 from that $5,000 investment. So this is perfect for those wanting to set cash aside for longer-term goals. The only major catch? In many cases, you cannot take out the money from your GIC until the time is up, or risk losing the interest you’ve made. So make sure once that cash is in, it stays in.

High-yield dividend stocks

Now if you’re looking to create passive income, you’ve likely already checked out dividend stocks to begin with. And granted, these are great options. The only major issue here is that dividend stocks will fluctuate with the market.

That being said, in many cases you can lock up some pretty great dividend yields that will provide you with long-term passive income. Furthermore, you can add returns to this. Together, this can add up to a lot more than just 5% per year.

For example, look back at those Canadian banks. Royal Bank of Canada (TSX:RY), for instance, is a stable company, but with shares far below all-time highs. And yet the provisions it has for loan losses will allow it to climb back up after this market downturn. How do I know? It has done it every time we’ve gone through a downturn, coming back from 52-week lows within a year.

What’s more, Royal Bank stock offers the chance of huge returns. Shares are down 11% in the last year, trading at 11.7 times earnings as of writing. So you can get a 4.54% dividend yield as of writing, which is far higher than its five-year average of 3.9%. Therefore, you can already get most of that 5% in passive income from dividend income alone. But on top of that, you can add in any returns.

Bottom line

Split it up! For long-term goals, I would absolutely lock up some of these 5% fixed income rates from GICs. It’s something that frankly isn’t going to be around forever as interest rates lower once more. But also, high-yield dividend income can be a huge benefit as well. Especially as the market recovers. Just make sure you’re considering safe stocks that have a solid history of growth behind them, like Royal Bank stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has positions in Royal Bank Of Canada. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy

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