The Tax-Free Savings Account (TFSA) is the ultimate investment vehicle that Canadians could ask for. The tax-sheltered status of the account lets you keep the returns from investments held in your TFSA safe from taxes. Since you contribute with after-tax dollars, the earnings from interest, dividends, and capital gains from a TFSA do not incur taxes, letting you enjoy more considerable long-term wealth growth.
To make things better, any withdrawals from the account will be tax-free. The amount you withdraw from a TFSA in a particular tax year will be added to the contribution limit in the next update. The key to success with a TFSA is making decisions with a long investment horizon. That means picking investments that are stable and can provide compounding returns without the need for constant monitoring for performance.
While adding growth stocks to your TFSA is necessary to inject growth, you must first anchor the portfolio with safe investments. It is a good idea to start by selecting investments offering predictability, low volatility, and underlying businesses that provide essential services. This way, you can count on your investment held in the tax-sheltered account to become a gift that keeps on giving.
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Regulated utility stocks
Against this backdrop, the only segment of the economy that I can count on without a second thought is the regulated utility industry. Companies in this sector offer earnings that are typically set through long-term regulatory frameworks. These companies provide virtually guaranteed returns, backed by stable and predictable cash flows.
The best Canadian utility stocks also provide quarterly distributions that keep growing each year. This way, the tax-free returns in your TFSA can keep pace with and even beat inflation. These are the kind of investments that tend to hold up in volatile environments when the rest of the stock market is under pressure.
When I think about a TSX stock that checks all the right boxes as a long-term TFSA holding, no better name comes to mind than Fortis (TSX: FTS).
Fortis
Fortis is the top pick for many Canadian investors among utility stocks. The $39.68 billion market-cap utility holdings company owns and operates several natural gas and electricity utility businesses across Canada, the U.S., and the Caribbean. All three of the markets are highly rate-regulated, and Fortis generates almost its entire revenue through long-term-contracted assets.
This means Fortis’s cash flows are predictable, stable, and offer the company’s management the visibility it needs with the finances that let it make better-informed long-term decisions. The essential nature of its services provides the defensive qualities that many investors seek in long-term holdings.
Its business model lets Fortis generate the kind of returns that let it spend on capital projects and grow shareholder dividends comfortably. Speaking of dividends, Fortis is one of the most reliable dividend-paying TSX stocks. After its latest dividend hike, it has increased quarterly payouts to investors for the last 53 years without fail.
The company’s capital plan expands its asset base each year, letting it provide growing returns that its investors can count on. As of this writing, Fortis stock trades for $77.93 per share and pays its investors $0.64 per share each quarter, translating to a 3.28% annualized dividend yield.
Foolish takeaway
Fortis is one of the most underrated TSX stocks because it does not offer much in terms of capital gains. It might be boring that Fortis doesn’t gain as fast as the rest of the market in bull markets. However, it also means that Fortis stock does not decline at the same pace as the broader market during bearish environments.
Stable, reliable, and able to perform through various market cycles, Foris can be an excellent long-term pick for a self-directed TFSA portfolio.
