A tax-free savings account (TFSA) is a great environment in which to hold stocks. Providing tax-free gains and dividends, it helps maximize your after-tax returns.
The TFSA is an especially good environment for holding dividend-paying stocks and interest-bearing bonds. The TFSA’s tax sheltering isn’t all that valuable for long-term shareholdings in stocks that don’t pay dividends, as such stocks are rarely taxed. If you never sell a non-dividend stock, you never pay taxes on it. Dividend stocks, on the other hand, pay out cash returns that are immediately taxable. So it’s good to hold dividend stocks in a TFSA. In this article, I will explore three dividend stocks that may be worth holding in your TFSA.
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Alimentation Couche-Tard
Alimentation Couche-Tard Inc (TSX:ATD) is a Canadian retail and convenience store company. The stock has a fairly low yield (0.96%), but an excellent five-year dividend growth rate (24% compounded annually). If you buy ATD today and the company keeps up its dividend track record, you will enjoy a much higher yield-on-cost than 1% in the future.
Will Alimentation Couche-Tard be able to keep up its stellar dividend track record?
If management keeps up the job it’s been doing, then probably yes. ATD is a very well-run company. It consistently grows and expands, buying up gas stations across Canada, the U.S., and Europe. At the same time, it generally finances its acquisitions with retained earnings rather than debt, resulting in a relatively low debt-to-equity ratio and low interest expenses. This fact is part of why ATD stock has a low yield. As you can see, in this case, the low yield is very much worth it, as the company uses its cash to make profitable investments for shareholders – that’s a better use of funds than dividend payments are.
Fortis
Fortis Inc (TSX:FTS) is a Canadian utility stock that recently notched 51 consecutive years of dividend increases, a track record that makes it a “dividend King.” Fortis is one of only two Canadian stocks to enjoy the “Dividend King” distinction, the other being Canadian Utilities.
Today, Fortis has a 4% yield, which is above average. And the dividend payout appears poised to continue growing. Fortis’ management has set a goal of hiking the company’s dividend by 5% to 6% per year until 2028. If it makes good on this pledge, then those buying the stock today will enjoy a higher yield-on-cost in the future.
Will management make good on the pledge? All signs point to yes. Fortis is one of the best-run Canadian utility companies. It has a manageable amount of debt, relatively low payout ratio, and track record of making investments that increase its rate base. Overall, investors in Fortis stock should be well rewarded going forward.
Royal Bank of Canada
Royal Bank of Canada (TSX:RY) is a Canadian bank stock with a 3.3% dividend yield. This is actually one of the lower yields among Canadian banks, which as a class are known for having pretty high yields. However, RY is among the better Canadian banks going by the “quality” factor. The company is well-run, has conservative lending standards, and does not pay out an overly high percentage of its earnings as dividends. A 150-year-old Dinosaur, it survived the 1929, 2008 and 2023 banking crises without so much as a scratch. Overall, it’s a very well-run bank whose shareholders are likely to be rewarded well into the future.
