Do you want to get the most out of your tax-free savings account (TFSA)?
If so, this month is arguably a tough time to operate.
This August, Canadian markets are approaching all-time highs, following a very strong start to the year. Adding to the complexity is the fact that some of the biggest gainers – oil stocks – are likely to decline whenever the Iran war ends. All parties to the conflict want it to end relatively soon, so we should assume that the oil shock will end before the year is out.
So, the pickings are not as good this August as they were at the start of the year. Investors will need to navigate the markets deftly in order to get the most out of their TFSAs this month. In this article, I’ll share two strategies I’d pursue to get the most out of my TFSA in August.
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Strategy #1: Increase fixed income holdings
This August seems like a pretty good time to increase fixed income holdings such as bonds and guaranteed investment certificates (GICs). The U.S. markets are pricey, the Canadian markets are getting there, and other global markets are rising as well. In this environment, it makes sense to de-risk one’s portfolio. A key way to de-risk your portfolio is to hold more fixed income investments, which are less risky than stocks on average.
One type of fixed income investment you could consider is a money market fund. Money market funds invest in portfolios of treasuries at various different maturities. Treasuries are virtually risk-free, and money market funds let you invest in them in a diversified form. So, money market funds can make a lot of sense for a lot of investors.
Another type of fixed income investment to think about is GICs. These are bond-like instruments sold by banks that pay you a little interest income. These days, the annualized yield on GICs is about 2.75%. That’s not a whole lot, but it’s enough to maintain your spending power most of the time.
Strategy #2: Invest in dividend stocks
Another strategy that seems fairly sensible this August is to invest in dividend stocks. The stocks that are driving the market higher this year are primarily tech stocks, which pay low or no dividends. High dividend sectors, meanwhile, are comparatively out of favour. By buying their shares, you might well enjoy a better return than you would by buying no-dividend stocks.
You can get exposure to dividend stocks easily by buying dividend index ETFs. Such funds invest in diversified portfolios of dividend stocks, eliminating the need for carefully picking stocks.
Take the Vanguard FTSE Canada High Yield ETF (TSX:VDY), for example. It’s an ETF built on high-yield Canadian stocks. It invests in sectors like banking, energy, utilities, and consumer staples. Its trailing yield is 3%, which is considerably higher than that of the Canadian markets as a whole.
VDY has 60 stocks, which is a decent amount of diversification. The ETF has a 0.22% management fee, which is relatively low. It tracks an index, which reduces portfolio turnover and other execution costs. Finally, VDY has a bid-ask spread between 0.01% and 0.03%, which is fairly low. So, VDY is a decent dividend fund that could add some much-needed income to your portfolio.
