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
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).
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 firstname.lastname@example.org or visit her web site at nancywoods.com
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