Written by Andrew Walker at The Motley Fool Canada
Canadians are wondering where they can find good value right now in the TSX for investing their 2024 tax refund. Registered Retirement Savings Plan (RRSP) contributions and Tax-Free Savings Account (TFSA) contributions are two of the options.
Contributions made to RRSPs reduce taxable income. Since taxes are deducted from a person’s salary based on the annualized amount of the income, people who max out their RRSP contributions each year often get a tax refund. This is particularly the case if they don’t have a company pension plan.
A popular Canadian savings strategy involves using the annual tax refund to make part of the next RRSP contribution. People in high marginal tax brackets see the best return. Ideally, you want to make RRSP contributions at a high marginal tax rate and remove the funds in retirement at a lower tax bracket.
Putting the tax refund in a TFSA would make sense for people who are in a lower tax bracket right now but expect their salaries and earnings to rise in the future. Savers who might need quick access to the funds in the coming two or three years might also decide to put the money in a TFSA where the money can be removed at any time without being taxed.
In the current market environment, it makes sense to look for dividend stocks with long track records of distribution growth. Companies that raise their dividends steadily tend to recover from market corrections and often rise to new record highs.
Fortis (TSX:FTS) raised its dividend in each of the past 51 years. This is one reason the share price has also trended steadily higher over the long term.
Fortis owns utilities in Canada, the United States, and the Caribbean. The businesses include natural gas distribution utilities, power generation facilities, and electricity transmission networks. Revenue is largely rate-regulated. This means cash flow tends to be predictable and reliable, which helps management plan for organic growth.
Fortis is working on a $26 billion capital program that will raise the rate base from $39 billion in 2024 to $53 billion in 2029. As the new assets are completed and go into service, there should be adequate cash flow growth to support planned annual dividend hikes of 4% to 6% over the five years. Investors who buy FTS stock at the current level can get a dividend yield of 3.7%.
TC Energy (TSX:TRP) raised its dividend in each of the past 25 years. The company should be able to extend the streak, supported by a wave of new assets coming online in 2025 and the next few years. TC Energy recently completed the Coastal GasLink pipeline in British Columbia and the Southeast Gateway pipeline in Mexico. Both assets are expected to ramp up operations and revenue generation in 2025.