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TFSA investors can double their balances by holding a high-yield dividend stock and a high-growth stock in their tax-advantaged account.
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Christopher is a CFA Charterholder and a former financial advisor at RBC. He is the founder of Blueprint Financial, a Canadian financial planning company.
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Canadians can meet short- and long-term financial goals through the Tax-Free Savings Account (TFSA). You can even double your TFSA balance over time with two investment strategies. All you need is to have the perfect combination of TSX stocks.
A high-yield dividend stock like Timbercreek Financial (TSX:TF) and a growth stock like Coveo Solutions (TSX:CVO) are ideal holdings in a TFSA. The former will enable you to reinvest dividends 12 times a year, while the latter should deliver outsized capital gains from price appreciation.
Reinvest your dividends
Income investors can steadily grow wealth through dividend reinvestment and a longer investment horizon. The power of compounding works best in a TFSA because of its tax-feature feature. Your balance should grow faster since all gains, interest, and dividends inside the account are tax-free.
Timbercreek Financial trades at only $6.60 per share but pays a juicy 10.45% dividend. Assuming you max out your $7,000 TFSA limit for 2024, your balance would be $19,638.52 in 10 years. In 15 years, it should grow further to $32,893.81.
The $550 million company is a non-bank, commercial real estate lender. It has a conservative lending program and extends structured financing solutions with terms not more than five years. In the third quarter (Q3) of 2023, net mortgage investments decreased 14.9% to $1.06 billion, while net income rose 22.2% year over year to $16.5 million because of strong interest income.
“The portfolio continued to generate strong interest income in the third quarter, allowing us to report year-over-year earnings per share growth, distributable income of $0.20 per share, and declare dividends of $0.17 per share,” said Blair Tamblyn, Timbercreek’s chief executive officer (CEO).
Timbercreek maintains a conservative portfolio, given an average loan-to-value ratio of 67%; 92.2% of accounts in the mortgage investment portfolio are first mortgages, and 86.5% of investments in the same portfolio are cash-flowing properties.
Tamblyn acknowledged that the current environment is a cyclical and occasional reality of Timbercreek’s market segment. However, it expects the commercial real estate activity to increase and drive transaction volume as interest rates stabilize soon.
Timbercreek has never missed paying monthly cash dividends since July 29, 2016. The company also offers a dividend-reinvestment plan. Besides the automatic reinvestment of dividends, investors can use the cash dividends to acquire additional shares at potential discounted prices.
Capital gains
Coveo Solutions belongs to the high-growth technology sector. While growth-oriented companies rarely pay dividends, they compensate with enormous capital gains from price appreciation. At $10.19 per share, the year-to-date gain is 12.22%, while the trailing one-year price return is 43.12%.
The Software-as-a-Service (SaaS) platform of this $1.04 billion company helps customers achieve an artificial intelligence (AI) experience advantage at scale. In Q3 2023, total revenue and SaaS revenue increased 12% and 15% year over year to US$31.2 million and US$29.4 million, respectively. The net loss improved 34.3% to $6.5 million versus Q3 2022.
Coveo’s enterprise-ready Relevance Generative Answering combines Large Language Model (LLM) technology with secure indexing and AI relevance capabilities. The company already obtained the first five orders for its new growth driver.
All TFSA investors
All TFSA investors can double their balances with the right stock mix and two effective strategies. Timbercreek and Coveo Solutions should deliver the goods within a longer time frame.
