GICs (Guaranteed Investment Certificates) really do seem like a no-brainer investment for any Tax-Free Savings Account (TFSA) right about now, with the recent August wave of stock market volatility and a potential recession that could hit at some point over the next 12-18 months.
Indeed, recessions entail quite a bit of pain for stock investors. However, many pundits see the next downturn as mild in nature. And though recessions are never ideal for stocks, the past year of volatility may have already priced in more than a mild contraction in the Canadian economy.
It can be a scary time to buy stocks, especially as we sail into September — a month that’s seen some pretty ugly trading days, historically!
In any case, smart TFSA investors know that timing the market is a bad idea and that long-term investing is key to putting one on the fast track to a nice retirement. In an era where inflation is running hot, I’d argue younger TFSA investors should stick with some of the higher-yielding stocks rather than settle for GICs.
GICs and risk-on dividend stocks? That’s the big question for TFSA investors!
Now, GIC rates are pretty good, whether we’re talking about the big banks or the smaller financial institutions (think Oaken Financial). But at today’s slate of valuations, I still find dividend stocks (especially those with high yields) to be capable of greater total returns over the next two to three years.
GICs are free from risk and offer north of 5%. That said, some high-yield dividend stocks offer more than 5% dividend yields and a considerable amount of upside potential. Of course, you’ll need to take risks. But if you’re young and venturesome, some risks are worth taking!
Today, the pipeline space isn’t just rich with yield; it’s also pretty rich with value. And you don’t really need to dig into the mid-cap universe to uncover stocks that offer next-level value and dividends.
TC Energy: High risk, higher reward?
Take shares of TC Energy (TSX:TRP), which is in a rut alongside the broader midstream energy industry. The company is down more than 35% from its high, thanks in part to a slew of industry and macro headwinds. At multi-year lows of around $48 and change per share, the yield has swollen to an unprecedented 7.74%.
Indeed, any dividend yield close to 8% ought to be viewed with skepticism. Nobody wants to hold a stock that’s in for a dividend cut! Fortunately, I don’t think TC Energy will slash its payout anytime soon.
The company has issues, but TC Energy’s dividend is still supported by impressive cash flows. Further, the management team still expects annual dividend growth to fall into the 3-5% range. Indeed, a 3% hike isn’t much, but given the headwinds, I’d argue that any such hike should be applauded by TFSA investors.
The bottom line
At the end of the day, TRP stock is a dividend juggernaut. And if it can escape its funk, contrarian investors may be able to lock in the dividend yield alongside potentially juicy capital gains in a recovery.
Is TC Energy a risky play at this juncture?
Definitely. But the potential rewards justify the risks for most TFSA investors, in my opinion.
If you’re an older investor, however, GICs may be the better bet while rates are high.
