It doesn’t make sense for Canadians not to take advantage of tax-free savings accounts (TFSAs) because everything earned inside is tax free. That’s right! You don’t need to pay taxes on any gains inside your TFSA.
That’s why the TFSA is a great vehicle for holding growth investments like stocks. However, investors should gain experience in a taxable account before replicating their success in a TFSA. The catch with TFSAs is that the losses you incur inside cannot be reported as tax losses.
Investors must be comfortable with what they hold in TFSAs, just like they should with what they hold in taxable accounts.
Here are two dividend stocks for your TFSA.
Quality business for income growth
In my opinion, Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is a good investment today. It has paid dividends every year since 1832. The bank holds an oligopoly position with five other big banks in Canada, and you may be delighted to find that Bank of Nova Scotia not expensive today.
At under $61 per share, the bank is priced at a multiple of about 10.6, while its normal multiple was 12.4 in the past decade. That implies a fair value of over $70. So, the shares are moderately discounted by 13%.
Its yield of 4.6% is decent for the quality bank, which has been awarded a S&P credit rating of A+. In the past four years Bank of Nova Scotia has increased dividends on average 7% a year. With a payout ratio of about 50%, its dividend is safe and should continue to increase every year.
Bank of Nova Scotia is the kind of quality company that is a core part of my diversified portfolio. The bank pays a decent yield of above 4% and increases it by at least 5% a year.
To complement this core holding, investors might consider value plays with safe dividends for potentially higher returns in a TFSA.
Value play
Northview Apartment REIT (TSX:NVU.UN) owns and receives rent from more than 24,000 residential suites across the Northwest Territories, Nunavut, British Columbia, Alberta, Saskatchewan, and Newfoundland and Labrador.
With exposure to resource areas, the REIT’s shares have fallen over 36% from a 2014 high of $29 to $18.40 per unit. Continued low resource prices will continue to drag on Northview’s performance.
However, in the last 10 years the shares traded at a normal price-to-funds-from-operations ratio (P/FFO) of 11.9, which implies a fair value of $29 should resource prices rebound.
The REIT’s yield of 8.9% is supported by a sustainable FFO payout ratio of 70%. So, while waiting for a price recovery shareholders can bank on that above-average yield.
REITs pay out distributions that are unlike dividends. If you wish to avoid the tax-reporting hassle, buy REITs in a TFSA or an RRSP.
In conclusion
You should consider quality dividend stocks like Bank of Nova Scotia for tax-free growth in your TFSA. Additionally, you can choose to buy value investments for high-capital gains.
In the case of Northview Apartment REIT, shareholders don’t know when the resource-price recovery will happen, but in the meantime, you can get a high, tax-free income by holding it in a TFSA.
