Forget about get-rich-quick schemes; most make you poorer. Instead, go with these three easy but sure steps to becoming a Tax-Free Savings Account (TFSA) millionaire.
As the name suggests, the Tax-Free Savings Account is designed to encourage Canadians to save periodically. Every year, there’s a limit that eligible account holders can contribute. If you fail to contribute periodically, it can be tough to catch up.
If you’ve never contributed to a TFSA, you could have room of as much as $63,500 this year! In 2019, the contribution room was $6,000. It may seem impossible to cough up $6,000 of savings in one go. However, it quickly becomes much more palatable if you divide it into monthly contributions of $500.
The key is to save periodically at intervals that work for you, whether that’s monthly or bi-weekly.
Invest for high returns
Ironically, the name, Tax-Free Savings Account is also misleading. It would be more meaningfully to call it the Tax-Free Savings and Investing Account, but then the name gets too long-winded.
When people hear the word savings, they automatically think of saving in a high-interest savings account or a GIC. TFSAs can actually be used for a range of much higher-return investments, especially in today’s low interest rate environment, including bonds, stocks, mutual funds, and exchange-traded funds (ETFs).
Become a TFSA millionaire
One proven strategy that has made millionaires is investing in dividend stocks with a track record of paying higher dividends. Enbridge (TSX:ENB)(NYSE:ENB) is one such stock. It has paid a dividend for more than 60 years and a growing payout for more than 20. In the past 10 years, its dividend-growth rate was a whopping 15%.
Over the years, it has become the largest North American energy infrastructure company. With the growing need for natural gas and oil in North America, and as the one that transports and stores energy, Enbridge’s cash flow generation is expected to be more stable than ever! This was evident by the company’s stable or even growing cash flow through the last recession and energy price collapse that occurred during the last decade or so.
The company aims to increase its dividend by 10% next year and estimates to increase its distributable cash flow by 5-7% per year after that. Let’s say it will increase its dividend by 5% per year in the future. Throwing that in with its current dividend yield of 6.1%, the stock can deliver total returns of about 11% per year on average over the next few years (without accounting for price appreciation driven by the stock’s undervaluation).
Assuming millennials contribute $500 per month to a TFSA portfolio that’s worth $63,500 today, has a 6% yield, and grows by 11% per year, it will be over $1,000,000 in 21 years! What a sure but fast track to becoming a millionaire! Even if you’re just starting with a $6,000 TFSA account this year, you’ll still get to more than $500,000 in 21 years, which is no small feat.
Don’t just stop at Enbridge, though. Building a diversified portfolio of quality stocks with different income and growth profiles is key. If you’re looking for another stock that’s paying 6% or higher with a similar growth rate, check out Brookfield Property.
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Fool contributor Kay Ng owns shares of Brookfield Property Partners and Enbridge. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends Brookfield Property Partners LP.