Choosing stocks for your Tax-Free Savings Account (TFSA) can be a daunting task, especially when you’re thinking long term. After all, your TFSA allows you to earn tax-free returns, making every dollar of contribution room incredibly valuable. So, how do you pick stocks wisely that will thrive over decades? Let’s explore two Canadian stocks that are worth considering for a buy-and-hold strategy in your TFSA.
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Big Canadian banks: A timeless investment
When it comes to Canadian stocks with long-term stability, the Big Six banks are among the top contenders. These financial powerhouses have not only weathered economic storms but have also consistently delivered dividends for decades. Whether during economic booms or downturns, Canadian banks offer both steady income and capital appreciation over time.
Right now, Toronto-Dominion Bank (TSX:TD) jumps out from the group. Despite recent rallies among its peers, TD has lagged behind, offering a compelling opportunity for TFSA investors. With shares currently trading around $78 and a price-to-earnings (P/E) ratio of 9.9, TD is priced at a 15% discount from its long-term average valuation. This makes it an attractive option for those looking for long-term growth.
Even during recessions, when bank earnings may fall temporarily, the recovery is often swift. For TFSA investors, the added bonus of a 5.2% tax-free yield makes TD an appealing option, especially given the bank’s strong dividend history. While growth in the U.S. may be capped in the near to medium term, TD could focus on the Canadian market, which could be advantageous, as the domestic banking sector offers higher returns on equity, with less capital intensity and regulatory pressure.
Fortis: A stable utility stock for reliable income
Another solid pick for your TFSA is Fortis (TSX:FTS), a leading North American utility. Much like the big banks, Fortis has proven its ability to deliver reliable dividends year after year, making it a must-have for income-focused investors. The company operates across 10 regulated utilities in Canada, the United States, and the Caribbean, providing essential services such as electricity and gas. Given its diversified, regulated assets, Fortis generates predictable earnings even in challenging economic environments.
Over the past year, Fortis has seen an 11% increase in its stock price, reflecting investors shifting more capital from fixed-income investments to equity after recent interest rate cuts. Fortis’s dividend history is impressive – it has increased its payout for 50 years. In fact, just this past September, the company raised its dividend by 4.2%, and it’s expected to continue increasing its dividend by at least 4% annually over the next couple of years.
However, at $62 and change per share, Fortis stock appears to be fully valued. While it’s an excellent long-term investment, TFSA investors may want to wait for a pullback before adding it to their portfolios to maximize value. Once it offers a more attractive entry point, it’d make sense to add Fortis as a reliable choice for tax-free dividend income.
The Foolish investor takeaway
Both TD and Fortis offer unique advantages for TFSA investors. With TD, you gain exposure to the stability of Canada’s banking sector at a discounted price, while Fortis provides a reliable income stream with its utility business model. As you build your TFSA portfolio, these stocks can form a solid foundation that offers both capital growth and income stability for years to come. Remember to buy at the right price, and these two stocks could help your TFSA grow for decades.
