Take advantage of the Tax-Free Savings Account (TFSA) and maximize your returns without the hindrance of taxes. If you’ve never contributed to a TFSA before, you could have as much as $63,500 of TFSA contribution room.
A lump sum of $63,500 may be too much to take out from one’s pocket to invest for most people. However, you don’t need a whole lot to get started on your investment journey. Let’s say you start off with a nice round number of $10,000.
If you save $5,000 every year thereafter, it will take 18 years for you to get to $100,000. What’s exciting is that you can get your investments to work for you to help you achieve the goal of $100,000 sooner! So, that you can work toward a $200,000 TFSA next.
Undervalued bank with a big dividend
For most investors, investing in proven dividend stocks like Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) work incredibly well, as they provide juicy income that delivers consistent returns year in and year out. Furthermore, their stable growth will support long-term price appreciation and dividend growth.
Currently, Scotiabank offers an attractive yield of about 5%, which has only occurred two other times in the last 10 years. That’s thanks partly to an increasing dividend and the fact that the stock has retreated to a more attractive valuation.
Scotiabank’s three- and five-year dividend growth rates are 6.4% and 6.5%, respectively. Over the next three to five years, the international bank is estimated to increase earnings per share by about 5.8% per year.
The 5% yield and let’s say 5% growth lead to estimated long-term returns of 10% per year. At about $70 per share, BNS stock trades at a price-to-earnings ratio (P/E) of about 9.8. Should the stock experience P/E expansion to its normal valuation, it will lead to an extra boost in returns of about 4% per year over the next five years. This implies wonderful estimated total returns of 10-14% per year over the period, in a top quality stock.
A disciplined saving and investing strategy in proven dividend stocks will help you get to a $100,000 TFSA sooner than you think.
If you have $10,000 and you save $5,000 every year thereafter, it will take 18 years for you to get to $100,000.
If you get total returns of 10% per year on the $10,000 investment and subsequent yearly $5,000 contributions, you’ll achieve a $100,000 TFSA in 10 years ($105,624 to be exact).
If you get returns of 14% per year with the same savings, you’ll get to a $100,000 TFSA in nine years ($112,946 to be exact).
Notably, the goal is not to aim for the highest returns because high returns tend to come with high risks. That said, if you employ a value and dividend investing strategy in a diversified portfolio of quality companies and buy dividend stocks like Bank of Nova Scotia when they’re undervalued, your risks will be greatly lowered.
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Fool contributor Kay Ng owns shares of The Bank of Nova Scotia.