Investors can earn tax-free returns through their Tax-Free Savings Account (TFSA). They can invest up to a specified amount, known as a contribution limit. The earnings on these investments, including capital gains and dividends, are tax-free. However, a decline in the company’s stock price bought through a TFSA and subsequent selling could lead to capital erosion and a reduction in the cumulative contribution limit.
Therefore, investors should consider adding quality dividend stocks to their TFSA in this uncertain outlook. These stocks can provide stability and also help build superior wealth over the long term. Against this backdrop, let’s look at my three top additions to your TFSA.
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Enbridge
Enbridge (TSX:ENB) is an energy infrastructure company. It transports oil and natural gas across North America through a tolling framework and long-term take-or-pay contracts. It also operates a low-risk, rate-regulated natural gas utility business and renewable energy assets backed by power-purchase agreements. These regulated assets and long-term contracts shield its financials from economic volatility, delivering stable and predictable cash flows. Supported by these solid cash flows, the company has paid dividends for 70 years and has also increased its dividend payouts at an annualized rate of 9% for 30 consecutive years. Its quarterly dividend payout of $0.9425/share translates into a forward dividend yield of 5.97%.
Moreover, Enbridge is expanding its asset base by investing $9 billion to $10 billion annually. Additionally, the company’s management anticipates deploying $23 billion of assets into service between 2025 and 2027. Amid these growth initiatives, the management expects its EPS to grow at a 4-6% CAGR (compound annual growth rate) through 2026 and 5% thereafter. Considering all these factors, I believe Enbridge would be an excellent addition to your TFSA.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) is another dividend stock that would be an excellent addition to your TFSA, given its consistent dividend payouts. The company provides financial services in over 20 countries, generating healthy cash flows that have facilitated consistent dividend payouts since 1833. Its quarterly payout of $1.06/share translates into a forward dividend yield of 6.36%.
Moreover, BNS is scaling back its exposure to Latin America and focusing on more profitable North American markets. It recently exited the retail banking sector in Panama, Costa Rica, and Colombia by transferring these operations to Davivienda in exchange for a 20% stake in the combined entity. The transaction, which the management expects to close by the end of this year, could reduce its common equity tier-one ratio by 10-15 basis points. Meanwhile, BNS has acquired a 14.9% stake in KeyCrop, increasing its capital deployment in the highly profitable North American market. The company’s valuation appears reasonable, with its NTM (next-12-month) price-to-earnings multiple at 9.4, making it attractive.
Fortis
Fortis (TSX:FTS) would be my final pick due to its regulated utility business, stable cash flows, and consistent dividend growth for 51 years. It serves 3.5 million customers across Canada, the United States, and the Caribbean, meeting their electric and natural gas needs. Around 93% of its assets are in the transmission and distribution business, making its financials less prone to commodity price fluctuations and market volatility. Also, its expanding rate base has boosted its financials and stock price growth. The company’s average shareholder return over the last 20 years is 10.3%, comfortably outperforming the broader equity markets.
Moreover, Fortis is growing its rate base with its $26 billion capital expenditure plan, which could increase its rate base at an annualized rate of 6.5% through 2029 to $53 billion. The company plans to generate 70% of the funding from cash generated from its operating activities and dividend reinvestments. So, these investments would not substantially increase its debt levels. Additionally, favourable customer price revisions and improvements in operating efficiencies could support its financial growth in the coming years. Amid these healthy growth prospects, Fortis’s management expects to raise its dividends by 4-6% annually over the next five years. Considering all these factors, I believe Fortis would be an ideal addition to your TFSA.
