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Canadians are fortunate to have the Tax-Free Savings Account (TFSA), a unique investment account where money growth is tax-free for life. Another outstanding feature is that withdrawals are also tax-free. You must make contributions without exceeding the annual contribution limits.
Holding cash in a TFSA is fine, although it’s not advisable because it doesn’t maximize portfolio gains. Account holders can hold income-generating instruments such as bonds, guaranteed investment certificates (GICs), mutual funds, and exchange-traded funds (ETFs). However, most TFSA investors prefer dividend stocks.
The TFSA increases in value over the years, allowing you to use it to build wealth or top up your retirement savings. But despite the fantastic benefits, do you have a real chance to increase the bankroll significantly?
blue chip stocks
Owning shares of Toronto Dominion Bank (TSX:TD) and Canadian Natural Resources (TSX:CNQ) provides uninterrupted streams of income as both are blue chip stocks. With the TFSA contribution cap of $6,500 for 2023, the cumulative contribution space for someone who turned 18 in 2009 or earlier is $88,000.
Let’s say you qualify or are eligible to invest the maximum and contribution cap and split it evenly between TD and CNQ. Please note that at the Fool we prefer a more diversified portfolio and do not recommend investing such a large sum in just a few stocks. Instead, we recommend that you mix and match a diverse group of dividend stocks to reach your target yield.
| Pursue | Price | dividend yield | holding period / years | TFSA in the year 2043 | Tax-free profit |
| TD | $79.40 | 4.75% | 20 | $113,136.30 | $69,136.30 |
| CNQ | $69.77 | 4.82% | 20 | $114,712.36 | $70,712.36 |
The above calculation is for illustration purposes only and does not take into account fees and others to reach the final balance and tax-free profit in 20 years. However, it is assumed that any quarterly dividends received have been reinvested with the holding period.
investment take-aways
TD has been paying dividends for 166 years (since 1857) and counting. The $145.21 billion financial institution is the second largest bank in Canada. Notably, it was the only company to report revenue and earnings growth during the 2008 financial crisis.
Large banks are building or increasing their loan loss provisions (PCLs) in anticipation of tougher economic conditions or a recession. The recent collapse of American banks is having a negative impact on bank stocks. Even so, TD will not wither or wither due to the headwind. Most industry experts agree that Canada’s banking sector is the bedrock of stability.
Canadian Natural Resources has a world-class asset base that sets it apart from industry peers. The $76.73 billion company produces crude oil (light, medium and primary heavy), bitumen (thermal oil), synthetic crude oil (SCO), natural gas and natural gas liquids (NGLs).
In 2022, net income and cash flows grew 42.7% and 33.9% year over year to $10.9 billion and $19.4 billion, respectively. Due to the solid financial position and balance sheet, the Board approved two dividend increases (45% combined) last year. Management plans to allocate 100% of free cash flow to shareholder returns when net debt falls to $10 billion.
power of composition
The power of compounding is always at play, regardless of the amount invested. As long as you maximize your TFSA limit each year and reinvest quarterly dividends, your bankroll should grow quickly. Additionally, holding dividend heavyweights TD and CNQ in your TFSA is a clear benefit.
