The TSX is gaining momentum as we near the end of the year. If you haven’t yet used your $7,000 Tax-Free Savings Account (TFSA) contribution, now is the time before the stock market returns to normal growth. The best stocks to invest in this account are the ones that can give you double-digit growth and outperform the market.
Two TFSA stocks to buy now
Here are two such stocks to buy and hold for the long term to maximize your earnings.
Constellation Software stock
The evergreen umbrella company of technology stock Constellation Software (TSX:CSU) is my first pick. Having even one share of Constellation can give you private equity-like returns. Like private equity firms, Constellation Software looks for opportunities to acquire small vertical-specific companies at an attractive value.
While skimming through the companies, it looks for those that generate stable cash flows and are niche and mission-critical to the client, which makes them sticky. The one thing all software companies seek to achieve is a stable client base. The cost of making software is less if it can scale its operations. The more it scales, the higher its profit margin.
Constellation lets the acquired companies operate independently and provides any management and networking support if needed. A software company organically grows by 2-3%. However, Constellation’s stock price appreciation depends on the value of the new acquisitions. And it funds these acquisitions from the cash flow earned by previous acquisitions. With 5G and the Internet of Things, smaller software companies will only grow.
Constellation is at the compounding stage, where it is growing at an average annual rate of 30%. If the company maintains this growth, the $4,310 stock could grow to $16,000 in five years.
goeasy stock
goeasy (TSX:GSY) stock fell sharply by 13% in the second half of October as Cormark analyst cut its third-quarter earnings per share (EPS) forecasts for the lender to $4.13 from $4.18. Are investors overreacting?
The lender has been steadily growing its subprime loan portfolio. It even revised its FY24 forecast upwards in the second quarter as it saw accelerated growth in loan receivables. For FY24, it expects gross consumer loans receivables of $4.55 billion to $4.65 billion. On this, it expects to earn revenue in the range of $1.5 billion to $1.6 billion.
Some quarterly fluctuation in its outlook is normal. The dip in interest rate is likely to slow goeasy’s earnings as it earns money from loan processing fees and interest income. It expects to earn a 33-35% yield from its 2024 loan portfolio. The company is growing its EPS by 15% and is trading at a forward price-to-earnings (P/E) ratio of 8.61, its average valuation.
goeasy is a stock that can give you both growth and dividends. Its stock price grows as its loan portfolio grows. It earns higher interest in a bigger portfolio, and it passes on a portion of it to shareholders through dividends. A 2.7% dividend yield may not look attractive but when this dividend grows at an average annual rate of over 30% the growth is. A $2,700 investment today could give you $200 in annual dividends in five years. Here’s how.
The $2,700 investment will buy you 15 shares of goeasy that pay $4.68 in annual dividend per share. 15 shares will give $70 in annual dividends. If the company continues growing its dividend by 30%, its dividend per share will grow to $13.6 in five years, and 15 shares will fetch $200 in annual dividends.
