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It’s no secret that there’s plenty of uncertainty in the market today. Whether it’s due to interest rates, inflation, or geopolitical concerns, investors are anxiously trying to figure out what it means for their investments in the stock market.
In the short term, unfortunately, there’s no good answer. It’s anybody’s guess as to how the broader stock market will be performing in the coming months.
But while it may not seem like an opportunistic time to be investing, the market’s uncertainty is not necessarily a reason to be sitting on the sidelines. There are many ways investors can prepare their portfolios to deal with the volatility that is coming.
Build a passive stream of income that is tax-free
One way to ease the market instability is to find an additional source of income. I’m not suggesting going out and looking for a part-time job. Building a passive income stream may be simpler than you realize. On top of that, it’s possible to earn that money completely tax free.
Dividend stocks offer passive income and are a great way of generating it. Dividend stocks are a great way to earn passive income. TSX There are many reliable dividend-paying companies available. Many of these companies are trading at attractive discounts right now.
Whether or not you pay tax depends on where you’re investing in the dividend stocks. Passive income from dividend stocks that is held in a Tax-Free Savings Account, (TFSA), is tax-free. The catch is that the TFSA has a contribution limit, so there’s only so much you could earn from tax-free dividend gains.
The total TFSA contribution space for anyone 18 years or older in 2009 is $81,500. Let’s assume that a maxed-out TFSA was invested in a dividend stock yielding 4% annually, which I’ll add is not overly difficult to find on the TSX right now. This $81,500 would provide more than $3,000 in tax-free passive income each year.
Bank of Montreal: Dividend stock #1
If you are looking to invest in dividend stocks, the banks are the best place to start. All five Big Five banks have a yield of at least 4%, with two exceeding 5.5%.
Canadian banks offer top yields and are a leader in reliability, so it is worth considering when looking for dividend stocks to buy.
With a yield rate of 4.6% Bank of Montreal (TSX:BMO)(NYSE:BMO) isn’t the highest yielding of the Big Five. However, it does have a nearly two-century-long payout streak.
That’s the exact type of dividend stock that I’d be looking to invest in ahead of potentially turbulent market conditions.
Dividend stock 2: Fortis
Passive income is the main reason to invest in dividend stocks. However, there’s more to look at than just the yield when choosing which dividend stock to invest in. A portfolio of investments can also benefit from dividend-paying companies.
What Fortis While the (TSX.FTS),(NYSE.FTS), dividend yield is not as high as it could be, what it does make up for is its defensiveness. Although a 3.5% yield may not be a bad thing, there are many other options for higher-yielding stocks. The utility stock is a great option for portfolios that require a high degree of defense.
Utility companies’ dependability stems from their consistent performance, regardless of macroeconomic conditions. They may underperform in bull markets, but you’ll be glad to own them in bear markets like these.
Fortis is a great dividend stock to own if you have a portfolio that favors high-risk growth stocks.