Canada Revenue Agency: 57% of Canadians Are Using the TFSA Wrong

The TFSA has outpaced the decades-old RRSP as the choice savings account, but still, more TFSA holders are using it the wrong way.

| More on:
Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks

Image source: Getty Images.

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.

More on Dividend Stocks

Dividend Stocks

2 Undervalued TSX Dividend Stocks to Buy in July

These unloved TSX dividend stocks could deliver attractive returns in the back half of 2022.

Read more »

sad concerned deep in thought
Dividend Stocks

$20 Billion Telco Merger: More Concessions and Conditions Ahead?

The mediation process in the proposed telco merger could lead to more concessions and conditions before the competition watchdog grants…

Read more »

Dividend Stocks

RRSP Investors: 2 Cheap TSX Dividend Stars to Buy for Total Returns

RRSP investors seeking attractive total returns can now buy top TSX dividend stock with high yields at discounted prices.

Read more »

rail train
Dividend Stocks

Canadian Pacific Railway (TSX:CP): A Top Wide-Moat Stock to Buy and Hold Forever

CP Rail keeps the goods moving around the country. Here’s why it’s a great pick for new investors.

Read more »

Businessmen teamwork brainstorming meeting.
Dividend Stocks

The 3 Top Large-Cap Stocks for TSX Investors

Have peace of mind by investing in top large-cap stocks during this market correction. Start researching BAM (TSX:BAM.A)(NYSE:BAM)!

Read more »

Golden crown on a red velvet background
Dividend Stocks

3 Dividend Aristocrat Stocks to Buy and Hold Forever

Three Dividend Aristocrats are excellent holdings for new and old investors with long-term financial goals.

Read more »

Dividend Stocks

Top TSX Stocks: 2 Industry Leaders to Own for 25 Years

These top TSX stocks pay attractive dividends and have made some long-term investors quite wealthy.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Dividend Stocks

Retirees: 2 Great TSX Dividend Stocks to Buy Now for TFSA Passive Income

These stocks look cheap to buy for a TFSA focused on passive income.

Read more »