Tax-Free Savings Accounts (TFSAs) are gaining considerable recognition among Canadians as one of the most effective means of building wealth. Their tax-sheltered status, which effectively means that capital gains, dividends, and interest earnings are tax-free for the life of the investment, enhances returns, accelerating the rate at which wealth can be created. That allows Canadians to achieve their investing goals, including financial independence, sooner.
Nonetheless, a persistent mistake being made by many Canadians when it comes to their TFSAs is that they are failing to take full advantage of the tax-free status and ability to accelerate the rate at which wealth can be accumulated over the long term. They are making this error by holding cash investments such as GICs in their TFSAs rather than growth-oriented assets like stocks that, over the long term, deliver superior returns.
Build wealth faster
The best way to use a TFSA is to hold long-term, high-growth investments such as Brookfield Infrastructure Partners (TSX:BIP.UN)(NYSE:BIP), which has gained a whopping 37% since the start of 2019. Despite this stunning return, the partnership, because of latest developments, is poised to deliver further value for unitholders, making it the ideal addition to any TFSA. That appeal is further enhanced by Brookfield Infrastructure’s low volatility, which, as measured by its beta of 0.81, indicates that it is less volatile than many other stocks and the overall market.
Brookfield owns a globally diversified portfolio of infrastructure assets that are vital to modern economic activity, including railroads, ports, toll roads, data centres, communications towers, and utilities. The construction, acquisition, and maintenance of infrastructure assets requires considerable funding, making it a capital-intensive industry. This means infrastructure providers typically have large amounts of debt, meaning they will benefit from the Fed’s latest interest rate cut because it will lead to lower financing costs.
It will be particularly beneficial for Brookfield, because it has long-term debt totalling a whopping US$15 billion. As those liabilities are either renewed, rolled over, or refinanced, a reduced headline interest rate means that the partnership can negotiate lower financing costs, thereby bolstering its profitability.
The growing likelihood of a resolution to the trade war between the world’s two largest economies, the U.S. and China, along with the rate cut bode well for improved global economic growth. That will lead to greater demand for the utilization of Brookfield’s assets, driving higher earnings for the foreseeable future.
Brookfield reported some solid third-quarter 2019 results, including a 16-fold increase in net income attributable to the partnership and a 15% increase in funds from operations (FFO) to US$0.82 per unit. That solid earnings growth was driven by a combination of organic growth and acquisitions, including spending US$240 million on enhancing its utilities, transport, and data centres businesses.
Brookfield, during the quarter, also progressed the acquisition of two natural gas pipelines in Mexico, the purchase of 130,000 telecom towers in India, and the approval of the US$5 billion takeover of rail company Genesee & Wyoming. Those deals, on completion, will further boost earnings and drive additional distribution hikes. Brookfield Infrastructure has hiked its distribution for the last 11 years to see it yield a very juicy 4%.
Brookfield’s ability to deliver solid value for investors becomes apparent when it is considered that over the last 10 years, it has delivered a return of 669%, including distribution, which is 23% on an annualized basis. If the distributions had been reinvested through the partnership’s distribution-reinvestment plan (DRIP), which allows unitholders to purchase units at no additional cost, that return grows to an impressive 891%, or 26% annually.
While past returns are no guarantee of a stock’s future performance if you invested your $6,000 TFSA contribution in Brookfield, added $6,000 annually, and reinvested all distributions, you could accumulate $50,000 in less than five years. That demonstrates how a less-volatile growth stock like Brookfield allows you to create wealth at a rapid clip, making now the time to invest.
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Fool contributor Matt Smith has no position in any of the stocks mentioned. The Motley Fool recommends BROOKFIELD INFRA PARTNERS LP UNITS and Brookfield Infrastructure Partners.