Which Stocks Should You Buy for a TFSA Right Now?

Banks like Scotiabank (TSX:BNS)(NYSE:BNS) are strong additions to a long-term TFSA. But is there a sector to avoid right now?

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn moresdf

A simple investment strategy that has developed during the pandemic involves building a “3D” portfolio. Those three “Ds” refer to defensive, diversified dividends. It’s a stripped-down take on the usual recession playbook and works on a build-and-trim principle.

Using this basic set of guidelines, any investor can pad out a Tax-Free Savings Account (TFSA) over a period of months during a drawn-out market contraction. Investors can choose from an array of dividend stocks from the best segments of the TSX. Some of the best dividend stocks include banks, blue-chip energy producers, and the best names in freight and transport.

What stocks to trim

Canadian Apartment REIT, also known as CAPREIT, has been having an on-and-off relationship with defensive investors during the pandemic. On the one hand, rent has been a hot topic, as households’ bottom lines get paddled by the lockdown. On the other, rent is the one thing that gets prioritized by households before food and utilities. After all, the latter two commodities aren’t much use without a roof over them.

Retail and office REITs are not the best buy for a TFSA, however, despite their appealing valuations. Yields may be high, but so is risk in an area likely to feel the pinch for months to come. One of the biggest problems with retail in particular is that lost revenue is lost forever. Months of lost sales won’t be recuperated. And yet rents are still being paid in an effort to maintain claims to prominent sites.

The contrarian case for buying bargain retail REITs for long-term recovery is worth a mention. However, the sector is facing stiff challenges from the e-commerce crowd. Look at Shopify’s breakout first-quarter performance, or Loblaw’s partnership with Instacart. Actual brick-and-mortar stores could offer a boutique experience in the future not accessible online; however, the thesis for owning them is weakening.

Office REITs are similarly tainted with uncertainty. Whole sectors are finding that they can be operated remotely, cutting down on electricity usage, rent, commuting time, and any number of other overheads. This model may even be carried over post-pandemic. The case for buying into any trust that holds office space is about as untenable as retail exposure in a long-term TFSA.

What stocks to build

Banks are one of the great strengths of Canadian stocks, especially when it comes to passive-income investing. They’re a popular addition to long-term portfolios and have gained traction south of the border, too. But what makes Canadian banks so appealing? The short answer is that Bay Street’s finest moneylenders pack defensive dividends with gradual growth just right for years-long appreciation.

Some casual TSX investors buying Big Five shares may be unaware of Scotiabank’s strong presence in Latin America. The Big Five banker commands an impressively wide economic moat in the Pacific Alliance countries, comprising Chile, Colombia, Mexico, and Peru. Scotiabank therefore satisfies all three tenets of a 3D investment, packing defensive dividends with some strong diversification.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Victoria Hetherington has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify. The Motley Fool recommends BANK OF NOVA SCOTIA.

More on Dividend Stocks

growing plant shoots on stacked coins
Dividend Stocks

5 Dividend Stocks to Buy With Yields Upwards of 5%

These five companies all earn tonnes of cash flow, making them some of the best long-term dividend stocks you can…

Read more »

funds, money, nest egg
Dividend Stocks

TFSA Investors: 3 Stocks to Start Building an Influx of Passive Income

A TFSA is the ideal registered account for passive income, as it doesn't weigh down your tax bill, and any…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

3 of the Safest Dividend Stocks in Canada

Royal Bank of Canada stock is one of the safest TSX dividend stocks to buy. So is CT REIT and…

Read more »

Growing plant shoots on coins
Dividend Stocks

1 of the Top Canadian Growth Stocks to Buy in February 2023

Many top Canadian growth stocks represent strong underlying businesses, healthy financials, and organic growth opportunities.

Read more »

stock research, analyze data
Dividend Stocks

Wherever the Market Goes, I’m Buying These 3 TSX Stocks

Here are three TSX stocks that could outperform irrespective of the market direction.

Read more »

woman data analyze
Dividend Stocks

1 Oversold Dividend Stock (Yielding 6.5%) to Buy This Month

Here's why SmartCentres REIT (TSX:SRU.UN) is one top dividend stock that long-term investors should consider in this current market.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

Better TFSA Buy: Enbridge Stock or Bank of Nova Scotia

Enbridge and Bank of Nova Scotia offer high yields for TFSA investors seeking passive income. Is one stock now undervalued?

Read more »

Golden crown on a red velvet background
Dividend Stocks

2 Top Stocks Just Became Canadian Dividend Aristocrats

These two top Canadian Dividend Aristocrats stocks are reliable companies with impressive long-term growth potential.

Read more »