In the last three years, investors have had $7,000 available for their Tax-Free Savings Account. But in that time, if you haven’t invested, that $21,000 is just sitting there! Investing that cash into dividend stocks is a great way to build passive income and maximize the tax advantages that come with this account. With dividends earning tax-free returns in a TFSA, every dollar goes back into your pocket. While you can choose from a variety of stocks, Veren (TSX: VRN) stands out as a particularly promising option for long-term passive income.
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Why Veren
Veren, trading at $8.03 at writing, offers an annual dividend yield of 5.8%. This means your initial investment would generate approximately $1,224 annually in dividends alone – completely tax-free in your TFSA. What’s remarkable about the oil and gas production company is its stability, backed by strong financials and robust operating cash flow of $2.2 billion over the trailing 12 months (TTM). This ensures the company can sustain and even grow its dividend over time.
Looking at its recent earnings as of the third quarter ending September 2024, VRN reported a profit margin of nearly 28% and an impressive operating margin of 44.4%. These metrics underscore the company’s efficiency and profitability. Despite economic fluctuations, the light oil producer’s revenue has remained strong at $3.9 billion. Plus, it boasts solid earnings before interest, taxes, depreciation and amortization (EBITDA) of $2.4 billion. While revenue growth has been modest at 1.2% year-over-year, its consistent cash flow and dividend payouts have made it a reliable choice for investors seeking stability.
VRN’s valuation metrics paint a compelling picture. The stock has a forward P/E ratio of 6.9. This suggests that it’s attractively priced compared to its earnings potential. Its price-to-book ratio of 0.72 indicates that the stock is undervalued, as it’s trading below its book value of $10.90 per share. This low valuation, coupled with its strong performance, creates an enticing entry point for investors looking to maximize returns.
Considerations
The stock has had a volatile year, with a 52-week range between $6.34 and $12.67. However, its recent upward trend signals investor confidence. With a beta of 2.7, VRN stock is more volatile than the market, but this also presents opportunities for growth when timed effectively. For long-term investors, this volatility could be an advantage, especially given its history of bouncing back strongly after market dips.
One of the standout features of VRN is its commitment to returning value to shareholders. With a payout ratio of 58.6%, the company strikes a balance between reinvesting in growth opportunities and rewarding its investors.
Looking ahead, VRN is well-positioned for growth. As its debt-to-equity ratio of 43.1% indicates, the company has managed its leverage effectively. Coupled with an enterprise value-to-EBITDA ratio of 3.8, this suggests the company is efficiently using its assets to generate earnings, thus making it an attractive investment for the long haul.
Bottom line
For investors who are just starting or those looking to optimize their TFSA contributions, the combination of tax-free dividends and potential capital gains makes VRN a compelling option. Even if you reinvest your dividends instead of withdrawing them, you could exponentially increase your returns over the years through the power of compounding.
All considered, allocating your TFSA contributions to VRN offers not only a strong dividend yield but also a stake in a company with solid financials, an undervalued stock price, and a clear commitment to shareholder value. As your dividends grow and your investment appreciates, you’ll find yourself inching closer to your financial goals with little effort. Proof that passive income truly can work for you.
