Soaring stock markets and threats of a trade war have investors wondering how they should invest their $7,000 Tax-Free Savings Account (TFSA) limit in 2025.
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GICs
Rates on Guaranteed Investment Certificates (GICs) reached 6% in late 2023 at the height of the cycle of interest rate hikes by the Bank of Canada and the U.S. Federal Reserve. As soon as the central banks indicated they were done raising interest rates, the market started to price in rate cuts, leading to lower bond yields and a decline in rates offered on GICs.
At the time of writing, investors can still get GIC rates between 3% and 4%, depending on the term and the institution offering the GIC. This is still above the rate of inflation. As long as the amount of the GIC is within the $100,000 limit and the GIC is provided by a Canada Deposit Insurance Corporation (CDIC) member, a GIC gives investors a risk-free option to generate returns on TFSA savings.
The downside of GICs is that the best rates are offered on non-cashable investments, so the money is locked up for the term of the certificate. That can be an issue for people who need to have quick access to their savings. In addition, the rate on the GIC is fixed for the term, and the rates offered on renewal might be lower.
Dividend stocks
Anyone who owns dividend stocks knows there is a risk the share price might fall below the purchase price. In addition, dividends sometimes get cut if a company gets into financial trouble. That being said, the yield on many top TSX dividend stocks is a lot higher than the rates offered on GICs. When companies increase the dividend, the yield on the original investment rises. Stocks can be sold at any time to access funds, so there is more flexibility for people who might need to cash out at some point to cover an expense.
TFSA income investors should look for TSX stocks that tend to raise their dividends every year despite the state of the economy. Enbridge (TSX:ENB) is a good example of a dividend-growth stock that provides an attractive yield.
Enbridge is working on a $27 billion capital program that will help drive growth in distributable cash flow in the coming years. The company is positioned well to benefit from rising domestic and international demand for oil and natural gas and also has renewable energy assets.
Investors who buy ENB stock at the current level can get a dividend yield of 5.9%.
The bottom line on TFSA investing
The best mix of GICs and dividends is different for every person, depending on the tolerance for risk, the desired rate of return, and the need to have quick access to the funds.
In the current market conditions, it is quite easy for TFSA investors to build a diversified portfolio of GICs and good dividend stocks to get an average yield of at least 4.5%. That’s not a bad option, with inflation below 3%.
