Buying growth stocks in a TFSA account can be a wealth builder. If you’d bought high-flying tech stocks like Shopify (TSX:SHOP)(NYSE:SHOP) and have doubled your money within the account, you are probably sitting on a decent capital gain. Congratulations; you have done well. But now it is time to lock in some of those profits.
The TFSA gives you a distinct advantage when it comes to capital gains, whether the stocks pay a dividend or not. Investors need to keep in mind, however, that stocks that do not pay a dividend, like Shopify, will not provide any return should their share prices fall sharply, unlike a dividend-paying stock, which will likely continue to provide a return regardless of the share price.
Shopify is at risk of a correction, after all. Sure, it is growing quickly. Revenue was up 50% year over year in the first quarter, so it must be doing something right. But it is by no means a cheap stock, and it is still losing money, with an operating loss of $35.8 million in the first quarter. Any misstep, and the company will likely see a huge hit to its share price.
Therefore, with an economic downturn likely on the horizon sometime in the future, TFSA investors should take advantage of the opportunity to start securing their position. In order to do so, you should take three essential steps, so you can sleep soundly in the event of a sharp drop-off in the share price.
Get your money back Make sure that you get your money back as soon as you can. If you doubled your share price in a stock like Shopify, make sure you get your money back immediately. Doing so will lessen your anxiety in the event of a harsh downturn in the stock price. Remember, the TFSA allows you to keep those gains tax-free, so apart from selling commissions, you get to keep all the profits.
Create dividends Every month or two, sell a few shares to create your own dividends. If the stock continues to rise, you will get larger dividends from share sales. This gives you back more capital and allows you to lock in higher gains should the share prices continue to rise. Sell at a slower rate now that you have your money back.
Put the rest of the money in a savings vehicle Take the proceeds from the share sales and put them into an ETF or high-interest savings account. An ETF like iShares Premium Money Market ETF will give you a yield of about 1.5% on the cash. If Shopify collapses, use the cash to buy back in. Buy the shares at a reduced price. Shopify is a good company, so if you can buy back in, do so at a cheaper level.
The bottom line Shopify is a great business and has rewarded shareholders greatly. But investors should start locking in their gains, especially in a TFSA. The TFSA gives you the ability to keep all your gains but does not allow you to write off losses.
Shopify reports its second-quarter 2019 results on August 1. That gives you a few days to lock in profits. If it knocks it out of the park, you will regret selling those shares but will still benefit from the remaining ones. If it stumbles and the shares collapse, you will be happy you locked in the gains when you did.
Fool contributor Kris Knutson owns shares of Shopify. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and Shopify. Shopify is a recommendation of Stock Advisor Canada.
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