How to Turn $6,000 Into $100,000
Written by Andrew Walker at The Motley Fool Canada
Retirement savers who have a TFSA room left are wondering which stocks are good to buy now for their self-directed portfolios. A popular investment strategy for building retirement savings is to buy quality TSX dividend stocks and use the distributions to buy new shares.
TFSA investors saw their contribution limit increased by $6,000 in 2022. This brings the cumulative maximum total contribution space to $81,500.
TD bank
TD (TSX:TD)(NYSE:TD) paid its first dividend in 1857. Investors have received a portion of the earnings annually since then and continue to see generous increases from the bank. In fact, TD has increased its dividend by 13% for fiscal 2022 and has a compound annual dividend growth rate of about 11% over the past 25 years.
Steady dividend increases are key to building long-term total returns on an investment. Each increase in the amount of the payout increases the return on the original investment. Additionally, companies that regularly increase their dividends typically see their stock prices rise over time.
TD faces some economic headwinds over the next 12 to 24 months. Economists and analysts are increasingly calling for a mild recession as the Bank of Canada hikes interest rates to cool an overheated economy and lower inflation. There will come a time when price increases will remain high alongside rising borrowing costs. This double whammy will hit businesses and consumers and could lead to an increase in loan defaults.
That being said, the sell-off in TD’s share price seems overdone. The bank is well capitalized to weather the downturn and remains very profitable. TD generated adjusted net income of $11.36 billion for the first nine months of fiscal 2022, compared to $10.78 billion a year earlier.
Management is using a good portion of the cash hoard built up over the past two years to make two strategic acquisitions in the United States. TD buys First Horizon for $13.4 billion in a move that will add 400 stores across the southeastern United States. Another deal worth $1.3 billion will bring in Cowen, an investment bank, joins the TD family and strengthens TD’s capital markets activities. The two deals prepare TD to drive long-term growth as the American economy expands. The acquisition of First Horizon will make TD a top 6 bank in the US market.
TD is trading for $87 per share as of this writing, compared to a 12-month high of around $109. Investors can now earn a 4% dividend yield.
A $3,000 investment in TD stock 25 years ago would be worth about $54,000 today if the dividends were reinvested.
fortis
fortis (TSX:FTS)(NYSE:FTS) is a good defensive stock to buy if you are concerned that the expected recession could be deeper than expected. The company derives 99% of its revenue from regulated assets, including power generation, power transmission, and natural gas distribution. These are essential services and the revenue streams tend to be reliable and predictable.
Fortis grows through a combination of acquisitions and internal projects. The current $20 billion capital program will increase the interest base by about a third to more than $41 billion by the end of 2026. As revenue and cash flows grow, management intends to increase the dividend at a compound annual rate of 6% through 2025. Investors should feel comfortable with the guidance. Fortis has increased its dividend in each of the last 48 years.
A $3,000 investment in Fortis stock 25 years ago would be worth about $51,000 today if the dividends were reinvested.
The quintessential top stocks to buy for TFSA total returns
TD and Fortis are good examples of top TSX stocks that have provided investors with solid returns. There’s no guarantee these stocks will deliver the same results over the next 25 years, but the strategy of buying quality dividend stocks and using the dividends to buy new stocks has been a proven way to build wealth. TD and Fortis are looking cheap right now, but they still deserve to be on your radar for a TFSA diversified bond fund.
That TSX index is home to many great dividend stocks that have produced similar or even better returns. Investors can take advantage of the market correction to buy these stocks at a discount for their retirement savings.
The post TFSA 101: How to Make $100,000 from $6,000 first appeared on The Motley Fool Canada.
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The Motley Fool recommends FORTIS INC. Stupid contributor Andrew Walker owns shares in Fortis.
2022