As this year finishes up and Canadians head into 2025, many will likely find themselves with an extra $7,000 of contribution room in their Tax-Free Savings Account (TFSA). But with the Canadian stock market on a tear – up nearly 24% over the past 12 months – the question on many investors' minds is: Is now still a good time to invest? The Toronto Stock Exchange (TSX) is at an all-time high, which naturally raises concerns about buying stocks at what could be perceived as inflated prices.
No one knows if the market rally will continue into 2025. And while the current market conditions may make some investors nervous, it's crucial to remember that the TFSA offers tax-free growth on both dividends and capital gains. This long-term tax shelter should encourage investors to think beyond short-term market fluctuations.
While some may prefer to play it safe by putting their money into guaranteed investment certificates (GICs), which are currently offering 4% for a one-year duration, stocks historically outperform other asset classes over time. For those with a long-term investment horizon, there are still opportunities in the market. Below are two stocks that I believe represent reasonable value, even as the TSX hits new highs.
Bank of Nova Scotia
Even with the TSX at its peak, Bank of Nova Scotia (TSX:BNS) remains an attractive option for TFSA investors. Although the market might seem overheated, this Canadian banking giant is trading at a reasonable price at $75.94 per share and a price-to-earnings (P/E) ratio of 11.7, which is in line with its historical average.
Bank of Nova Scotia is one of Canada's Big Five banks, which means it benefits from a highly regulated and stable operating environment, essentially enjoying an oligopoly status in the Canadian banking sector. But what makes this stock intriguing is its presence in emerging markets, particularly in Latin America. This exposure provides a potential tailwind for long-term growth, even when the Canadian economy experiences slower growth.
The stock's most compelling feature is its generous yield of approximately 5.6%. This dividend is not only attractive but also supported by a payout ratio of about 68%. For investors looking to balance capital appreciation with a reliable income stream, Bank of Nova Scotia is a good consideration for the TFSA.
Canadian National Railway
Canadian National Railway (TSX:CNR) is another good addition to a diversified TFSA portfolio. This iconic blue-chip stock has demonstrated remarkable resilience and growth over the past 15 years. In this period, at a compounded annual growth rate (CAGR), CNR has seen revenue growth per share of 7.3%, earnings per share growth of over 10%, and EBITDA (a cash flow proxy) growth of 8.5%. The company's ability to generate consistent revenue and profit growth, even in the face of economic challenges, speaks to its strong business model and competitive advantage in the North American rail industry.
Furthermore, CN Rail has a strong track record of dividend growth. Over the past 15 years, CNR has grown its dividend at an impressive CAGR of 13.7%, which outpaced its earnings growth during this period. As a result, the company's payout ratio has gradually increased, but it remains manageable, with the estimated payout ratio at 46% of earnings for this year.
CNR Dividend Yield data by YCharts
At $153.35 per share at writing, Canadian National Railway offers a dividend yield of 2.2%. While this might seem modest compared to higher-yielding stocks, it's important to note that CNR is trading at the higher end of its 10-year yield range, indicating that the stock potentially trades at a good valuation.
Analysts are optimistic about the company's future growth prospects, with earnings projected to grow at over 10% per year over the next couple of years. Furthermore, analysts have set a 12-month price target for CNR that suggests a potential upside of over 16%. Given its growth trajectory and the stability of its dividend, CNR is a prime candidate for long-term growth in any TFSA.
