Are you planning to save money long-term using a tax-free savings account (TFSA)?
If so, it helps to know which stocks and ETFs you will be buying in the account.
Generally speaking, it is best to have a reasonably diversified portfolio, one with at least a few dozen stocks along with different asset classes (e.g., GICs, money market funds, REITs etc).
For the most part, investing your entire TFSA into an individual stock is not a good idea. Unless you have an information edge, it usually leads to underperformance. However, it is definitely possible to find defensive dividend stocks that are fairly safe and can add dividend income to your TFSA. In this article, I’ll explore one 3.2% dividend stock to build your 2027 TFSA contributions around.
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Fortis
Fortis Inc (TSX: FTS) is one of Canada’s biggest and most successful utility companies. It is best known for its exceptional dividend track record, having raised its dividend 52 years in a row. Over the last 20 years, Fortis has outperformed both the S&P/TSX Capped Composite Index and the TSX Utilities sub-index. The fact that Fortis has performed well over the years does not guarantee that it will continue doing so in the future. However, as I will show in the next section, the company still has the advantages that powered its outperformance in the past.
Dividend discipline
One thing that Fortis has going for it, and a probable reason for its outperforming other TSX utilities, is its disciplined dividend policy. The company tends to pay out about 70% of its earnings as dividends. This is a lower payout ratio than many Canadian utilities have. In the utilities world, a lot of companies tend to push it with dividends, having payout ratios above 100%. Fortis doesn’t do that, which leaves it with more money to reinvest in its business.
Investments in growth
Another thing that has driven Fortis’ outperformance over the years has been its focus on growth. Utilities generally aren’t known as big growers, but Fortis has grown quite a bit over the decades, buying up utilities across Canada, the U.S. and the Caribbean. Fortis isn’t buying up any whole utilities these days, but the company is currently undertaking a $32 billion capital expenditure (CapEx) program that will drive a 7.5% compounded annual (CAGR) increase in the company’s rate base. The company expects this increase in the rate base to increase earnings over time.
Dividend potential
Fortis currently pays a $0.665 quarterly dividend. That works out to $2.66 per year. The stock cost $84.05 at the time this article was written. So, Fortis has/had a 3.2% dividend yield. If you invest $100,000 in the stock – a sum that many Canadians can deposit into a TFSA – you get roughly $3,160 in annual dividend income if the payout doesn’t change.
As you can see, Fortis has the potential to generate considerable dividend income. If the company keeps up its dividend growth track record, then it will pay out even more than the table above implies! Even if it doesn’t, $3,160 per year isn’t bad.
