According to a survey conducted by the world’s third-largest market research company, more people have a TFSA than an RRSP. 57% of people have a TFSA, while 52% have an RRSP. But even when more people are making the smarter choice of choosing a TFSA, many of them are still not getting the most out of it.
According to the survey, 42% of the TFSA holders are using it to stash cash or as a regular savings account, and 15% have bought GICs. That’s 57% of total TFSA holders who are getting the bare minimum out of their TFSA savings. A relatively smaller number of TFSA holders have made the smart move of using their TFSA for what it was intended for: an investment vehicle.
Interests and GICs/term deposits
Let’s say you are using your TFSA as a savings account. You hope to grow your wealth with the interests generated. But how much wealth will you really be growing with a TFSA? The best rates you are going to get are somewhere around 2.3%. Let’s say you have contributed the maximum amount allowed in your TFSA, $63,500. At 2.3%, you will be getting $1,270 a year.
Even with years and years of compounding, this rate won’t lead to a very sizeable nest egg. It is barely keeping pace with inflation.
Let’s take a look at GICs. Most people prefer to go with five-year term GICs. Even though more years would mean better numbers in the end, GICs over five years are not covered by Canadian Deposit Insurance Corporation. The best GIC rates barely touch 3%, most of them lying somewhere around 2.75%. Even at 3%, you are looking at $158 a month out of your fully stocked TFSA.
Investing is a much better choice
So, why don’t people go for investment? It might be the fear of losing money or confusion between investing and trading. An effortless way of going around this risk is betting your TFSA money on Dividend Aristocrats — companies with years and years of consistent and increasing dividend payouts, with the added benefit of capital growth.
Two such stocks are Canadian Utilities (TSX:CU) and Enbridge (TSX:ENB)(NYSE:ENB). Canadian Utilities is engaged in the ever-green business of power generation and distribution, while Enbridge is the largest oil pipeline operator in North America. Both companies have a stable business model and a stellar dividend history.
Canadian Utilities has increased its dividend payouts for 46 consecutive years and has one of the best dividend histories in the country. The current yield is a decent 4.33%. This rate will get you $2,750 a year out of your TFSA. It’s a solid investment, paying way better than the best interest rates and GICs. And if we consider the 10-year growth of 93%, this investment may double your money in about 11 years.
Similarly, Enbridge has a history of increasing dividends for 19 consecutive years. It currently has one of the best yields among the aristocrats — a juicy 5.84%. Your TFSA in Enbridge will get you a monthly sum of $309. No interest rate or GIC in the country can even come near this number. And that’s beside the 120% growth of Enbridge’s market value in the past 10 years.
Foolish takeaway
The TFSA is a great investment tool. Using it as a simple savings account or a GIC is almost like squandering the potential it offers. Savings or GICs might seem better at protecting your money and offer dependable payouts, even in harsh economic conditions. But a lot of stocks have weathered the worst market turbulence without once slashing their dividends. Safe investment is the best way to utilize your TFSA and unleash its full potential.
