If you’re still waiting around for better opportunities to come your way before you put that latest $7,000 TFSA (Tax-Free Savings Account) contribution to work, you may very well be waiting until January, the time when you’ll be able to contribute another $7,000. Indeed, by then, you’ll have more cash to invest that’s sitting vulnerable to inflation, which is still lingering in the background. Of course, when it comes to beating inflation, stocks are often one of the best ways to go.
Whether you’re looking for a dividend that can grow at around the rate of inflation or total returns that help you grow in spite of higher inflation, there are plenty of fairly valued, even slightly undervalued names in this market. With the TSX Index a percentage point or two away from new all-time highs, it can feel like a bad idea to be a net buyer of stocks right here, especially since it’s September, a historically horrifying month for the equity markets.
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Seeking cheap dividend payers for a TFSA?
At the same time, though, you don’t want to be caught waiting too long in cash, especially if you were too frightened to buy anything during the brief sell-off we had earlier in the year due to the Iran-U.S. war. With U.S. tariffs threatening to weigh heavily on economic growth on this side of the border, it certainly feels like Mr. Market hasn’t yet got the memo that things could get nastier with the trade war. Either way, tariffs and the pain they could inflict don’t seem to be enough to take away from the tremendous strength seen in the big Canadian banks as well as the energy names and gold miners.
Indeed, the TSX Index isn’t exactly the most diversified market in the world, at least from a sector breakdown perspective. But either way, I still think that the Canadian stock market could outperform due to the greater representation of value names relative to the S&P 500, which is so heavily concentrated in big tech and could have a big tumble once the next correction inevitably hits and heightened valuations begin to contract.
TC Energy
In this piece, we’ll have a look at a TFSA portfolio with two years’ worth of contributions ($14,000 altogether) and the potential passive income it could produce if invested in a high-quality dividend payer, rather than held in savings for a sub-1% rate. At this juncture, TC Energy (TSX: TRP) looks like a gift that keeps on giving. With a nice 4.1% dividend yield and a solid history of generous dividend hikes, the latest 13% dip in the name seems like more of an overreaction than anything else.
A 4.1% yield on $14,000 in invested principal would amount to $574 in a year, or just shy of $48 per month. If held in a TFSA, that’d be a tax-free dividend paid out every quarter ($143.50 every three months) for you to divvy up and budget for each month.
Indeed, TC Energy’s structural tailwinds couldn’t be stronger; at least in my view, natural gas infrastructure looks to become constrained amid the great AI data centre buildout. In my view, it’s a massive macro trend that sellers of the stock seem to be missing amid nearer-term uncertainties.
Perhaps it should come as no surprise to hear a big firm like Jefferies upgrading the stock to a buy after the latest valuation reset. Nobody knows how long the dip will extend, but I’m inclined to agree with Jefferies, which seems to see the latest drop as more of an opportunity.
