Do you want to enjoy tax-free gains by investing in a diversified portfolio of Canadian stocks?
If so, it helps to invest in shares of those companies that have strong balance sheets, good competitive positions, and modest valuations.
In this article, I will explore two such stocks that may be worth holding in your TFSA for tax-free gains.
Brookfield
Brookfield Corp (TSX:BN) is a Canadian financial services company best known for its activities in asset management, insurance, and renewable power. It recently made headlines when one of its subsidiaries scored the biggest renewable deal in human history, supplying Microsoft with 10.5 gigawatts of power. Other notable recent developments from the company were several multi-billion dollar funding rounds (for its own funds, not for shares, which are being repurchased).
Brookfield’s investment track record over the last 15 years was better than Warren Buffett’s in the same period. Part of that was down to Brookfield’s smaller size, but there’s more to the story than just scale and its advantages. Brookfield has many qualitative advantages that have enabled it to acquire a market-beating track record.
First, the company has a good reputation, which gives it access to deals that other companies wouldn’t get. Some examples of such deals include the 2018 purchase of Oaktree Wealth Management, a prestigious credit firm, as well as the already-mentioned Microsoft deal.
Second, the company has a pretty good investment philosophy. It follows the same value investing philosophy that made Warren Buffett rich. The company’s portfolio holdings are pretty similar to those of funds in the Buffett sphere of influence, only Brookfield also gets in on the “special deals” mentioned above.
Third and finally, Brookfield manages its debts in a very intelligent way. The company has a number of partially publicly traded subsidiaries that hold some of its leverage, and it also has a number of “trophy properties” that are financed on a no-recourse basis. Both of these approaches – partially spinning off subsidiaries and financing properties on a property-specific basis – help prevent Brookfield’s debts from causing it trouble on the corporate level.
Alimentation Couche-Tard
Next up we have Alimentation Couche-Tard Inc (TSX:ATD).
Alimentation Couche-Tard is a Canadian convenience store chain that, like Brookfield, is very well-run. The convenience and gas retailer has compounded its revenue at 3% and its earnings at 11.7% per year over the last five years. In the trailing 12-month period, it enjoyed a 21.2% return on equity.
Alimentation Couche-Tard has grown a lot over the years thanks to its smart acquisition strategy. The company has invested a lot in growth, but it hasn’t over-borrowed to do it, instead investing its profits back into its own business. As a result of this strategy, ATD has a pretty low dividend yield (about 0.8%) but it has compounded consistently over the years.
Another potential positive here is ATD’s fuel sales business. A lot of big investors, including Warren Buffett, think that oil prices will remain pretty high for the next five years. Indeed, they have good reasons for thinking that, as OPEC continues keeping oil output low while oil demand creeps up inch by inch each year. So, there’s a good possibility that ATD’s fuel business will thrive, while ATD as a whole is less exposed to oil than a pure play oil company is. You could think of an investment in it as a “hedged bet on oil” in a way.
