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I want a better return on my TFSA. What should I buy?

Dear Nancy,

I'm saving up for next year's Tax Free Savings Account and wondering what suggestions you may have for what to put in it. I have a medium-term horizon, perhaps needing the money in five years or so for a new car or house. I want the money to grow - and faster than today's interest rates of about 1 per cent. What investments are a good balance of risk, reward and safety? Signed Scott

Dear Scott,

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As you know you can contribute $5,000 per calendar year to your TFSA.  If you have been doing it for the past four years, you are starting to accumulate a nice small nest egg. Adding in the $5,000 for 2013 your account should be worth $25,000.

If in the past you have been conservative and getting a lower interest of say 1.2 per cent, your account would be worth approximately $20,600.

There are different ways to view the TFSA. If you see it as a place to have your emergency fund and have it safe and secured but shelter the interest income, then you will not see a lot of growth.

If you want to use the TFSA as a way to shelter taxation on income and growth be aware that you will be sacrificing the possible dividend tax credit for domestic investments.  That is not a big sacrifice because anything you withdraw is tax free.

Since you stated that you want the money to grow, look to the typical blue-chip dividend stocks like the banks and utilities. They are what are usually held in dividend funds. The dividend yields presently are running approximately 3-5 per cent.  The larger capitalized companies generally provide a better stock price stability but be aware there is always the exception to the rule.  Diversification across sectors helps to reduce overall volatility to a portfolio.

With the economic conditions the way they presently are, I would focus on the dividend yield first and foremost than any potential growth.

A good ETF that satisfies the criteria of diversification and better than 1 per cent income is the iShares DJ Canada Select Dividend Index Fund (XDV).

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As always, please check with your own investment adviser to check for suitability.

__________

Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. To ask her a question, send an e-mail to asknancy@rbc.com or visit her web site at nancywoods.com

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About the Author

Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. More

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