It is the most wonderful time of the year.
Yes, I am talking about the TFSA contribution season, that special moment when financial nerds can put an additional $ 6,000 to work within their tax-free savings accounts.
Personally, I have an important goal for my TFSA. I want the account to grow steadily until it is time for me to withdraw, and then I will use it to provide a constant source of tax-free income. This means that I try to load it with a combination of dividend growth stocks and safer high yield shares. Combined, these two sources ensure a good dividend yield today and the potential for payment growth in the future.
Let’s take a closer look at the actions I bought with this year’s TFSA contribution.
The best bank in Canada?
I have considered for a long time Royal Bank of Canada (TSX: RY) (NYSE: RY) as one of the best banks in Canada. It is simply a giant.
Let’s start with your Canadian operations. Royal Bank has the highest or second highest market share in all banking categories in Canada. More Canadians have a Royal Bank bank account than any other financial institution. The company is side by side with Toronto-Dominion Bank as the largest mortgage lender in Canada. Their wealth management, credit card and insurance businesses are also strong. RBC Capital Markets has also long been one of the leaders in investment banking.
Canadian banking is one of the best companies on the planet. The top five players are virtually owners of the market, which guarantees rational competition. The riskiest mortgages are insured against default, which eliminates much of the risk of that part of the business. In fact, Canada’s leading banks have been some of the best long-term investments on the planet, and none of them have lost a dividend in more than 100 years. Royal Bank began paying dividends to investors in 1870 and since then has not lost a payment.
The company has taken its reliable Canadian bank profits and put them to work in other nations with better growth potential. RBC operations in the US UU., Which include retail banking and wealth management services, now represent 23% of its total profits, while its operations in the Caribbean add 15% to the final result. The US part UU. In particular, it also offers a much better growth potential than the rest of the business, since the fragmented nature of the US financial services market. UU. It makes it an excellent place to buy assets.
Royal Bank has long been the most expensive Canadian banking action. That is not really surprising; In general, the best company in the sector has a valuable valuation.
A couple of factors helped me to convince myself today that it is a good entry point. First, the company’s valuation has been reduced somewhat as the general weakness has affected the Canadian banking sector. The stock now trades at just 11.2 times the expected earnings of 2020, with a price / earnings ratio below 11 times the expected earnings of 2021. It is a very reasonable price to pay.
Another interesting value metric is the dividend. Royal Bank shares currently yield more than 4%, which is a fairly high return for this particular share. Payment is generally in the range of 3.5%. As someone seeking income from their TFSA, the momentarily higher performance was an attractive feature.
The bottom line
For me, the choice was simple. Royal Bank is an excellent company, an institution at the top of Canadian business. I had the opportunity to buy shares in what I consider at least a fair valuation. And I am sure that the company can continue to increase both the final result and its generous dividend of 4% in the coming years.
I could not miss the opportunity to own this company in the long term. It is too good.
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Silly taxpayer Nelson Smith owns shares of TORONTO-DOMINION BANK and ROYAL BANK OF CANADA.