The TFSA Mistake Costing Canadians Millions

Holding cash instead of more income-producing assets like dividend stocks in a TFSA could cost Canadians millions.

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Financial conditions in Canada have loosened after nine rate hikes by the central from March 2022 to July 2023. The policymakers held the rate steady at 5% in their last three meetings in 2023 (September, October and December) for three consecutive meetings.  

However, despite the improved situation, some financial experts don’t see the Bank of Canada rushing into rate cuts. They expect the higher-for-longer scenario to extend into 2024. Earl Davis, head of fixed income and money markets at BMO Global Asset Management, predicts the cut to begin after the third quarter (Q3) next year.

These expectations warn Canadians about the need to protect their money and investments. Tax-Free Account Savings (TFSA) users, in particular, should rethink the utilization strategy for the tax-advantaged account. BMO, TSX’s dividend pioneer, reported in 2022 that cash is the popular asset in the TFSA, not income-producing assets.

Costly mistake

Cash is king, but holding more cash in a TFSA is a mistake that could cost millions. Accountholders can win big and earn more by investing rather than keeping cash idle. The increase in the annual contribution limit to $7,000 in 2024 is an excellent opportunity to prepare for the uncertainties ahead, including slower economic growth.

Since money growth is tax-free, capital grows faster in a TFSA. You can hold high-yield dividend stocks like Gibson Energy (TSX:GEI) and Yellow Pages Limited (TSX:Y) to take advantage of the power of compounding.

Generous income provider

Gibson Energy is for yield-hungry income investors. At $19.55 per share, the energy stock pays a mouth-watering 7.98% dividend. Your $7,000 TFSA limit can purchase 358 shares and generate $546.61 tax-free income annually. If you reinvest the dividends every quarter and repeat the process yearly, each tranche of $7,000 will more than double ($14,845.94) in 10 years.

The $3.16 billion liquids infrastructure company can store 25.2 million barrels of oil and operates over 500 kilometres of crude pipeline across North America. Its president and chief executive officer (CEO), Steve Spaulding, expects the expanded liquids infrastructure asset base to deliver growing long-term, high-quality cash flows. Gibson has never missed a quarterly dividend payment since Q1 2014.

Sustainable payout

Yellow Pages flies under the radar but is suitable for dividend earners looking for sustainable payouts. Some consider the $204.3 million company old-school because of the Yellow Pages directories. However, it provides digital media and marketing solutions besides owning and operating properties and publications.

If you invest today, the communications services stock trades at $10.95 per share and pays a hefty 7.31% dividend. I mentioned sustainable payouts because the payout ratio is only 21.02%. In the first three quarters of 2023, revenue and net income declined 9.9% and 20% year over year to $183.5 million and $35.2 million, respectively.

Nevertheless, Yellow Pages president and CEO, David A. Eckert, assures continued profitability and cash flows. He believes the solid fundamentals bode well for the company’s medium- and long-term future.

Higher returns

BMO Economics advises TFSA users to take advantage of miss higher returns from long-term investments by maximizing their contribution limits. More importantly, having more dividend stocks than cash in your TFSA would be best.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Gibson Energy and Yellow Pages. The Motley Fool has a disclosure policy.

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