The Tax-Free Savings Account, or TFSA, was introduced back in 2009 to encourage savings among Canadians. Any returns derived in this popular registered account are sheltered from Canada Revenue Agency taxes making it ideal to hold a diversified basket of dividend and growth stocks.
Here, we look at two top TSX stocks you can buy and hold in a TFSA right now.
A dividend stock for your TFSA
The first TSX stock on my list is Aecon Group (TSX:ARE), a construction and infrastructure development services company.
It reported sales of $4.7 billion, an increase of 18% year over year. But overall profitability was negatively impacted by an operating loss of $120 million on Aecon’s four legacy projects. It also ended 2022 with a backlog of $4.3 billion, providing investors with top-line visibility.
Aecon emphasized, “Strong revenue growth, and new awards in the year of $4.8 billion, were underpinned by a strategic focus on clean energy and decarbonization projects.”
Further, the company stated it has a pipeline of projects across multiple sectors and geographies in the construction segment. It has around 750 projects underway, with an average project size of $30 million.
In Q1 of 2023, 54% of Aecon’s revenue in the last 12 months was derived from non-fixed price contracts, up from 39% in the prior-year period. A recurring revenue base provides stability and supports consistent dividend increases.
Aecon pays shareholders an annual dividend of $0.74 per share, translating to a yield of 5.5%. In the last 15 years, these payouts have risen by 9% annually.
Analysts now expect the TSX stock to increase earnings from $0.47 per share in 2022 to $1.12 in 2024. Priced at 11 times forward earnings, Aecon is one of the cheapest dividend stocks in Canada. Due to its attractive valuation, analysts expect ARE stock to surge about 18% in the next 12 months.
A tech stock for your TFSA
One of the largest tech companies in Canada, Constellation Software (TSX:CSU) has already generated game-changing wealth for long-term shareholders. CSU stock has returned a staggering 18,000% since its IPO in 2006, valuing the company at a market cap of $58 billion.
Constellation Software acquires, manages, and builds VMS, or vertical market software, businesses that offer enterprise-facing mission-critical solutions. It aims to acquire profitable businesses with growth potential resulting in revenue growth and expansion of profit margins.
Its revenue consists of software license fees, maintenance fees, hardware sales, and professional service fees. As its target companies provide mission-critical solutions, they benefit from higher retention rates and low switching costs.
In Q1 of 2023, CSU increased sales by 34% year over year to $1.9 billion, while free cash flow grew 40% to $453 million. A high free cash flow margin enables CSU to pursue inorganic opportunities, something the company has done successfully over the years.
Analysts expect Constellation Software to increase sales from $9 billion in 2022 to $12.8 billion in 2024. Its adjusted earnings per share are forecast to expand from $70.63 to $100.4 in this period.
So, CSU stock is priced at 4.5 times forward sales and 27 times forward earnings, which is steep. But it’s trading at a discount of 12.5% to consensus price target estimates.
