What if you were told that there is a sure way to make tax-free dollars? A way to pocket 100% of your income, with no deductions or penalties? What if this would shorten your work life and speed up the achieving of your goal of financial freedom?
Well, the TFSA is one way to do all that. In 2019, the TFSA contribution limit will increase by $6,000, bringing the cumulative contribution limit to $69,500 in 2020. I find that a good way to convince investors of the TFSA’s merit is to quantify the opportunity cost of not investing here. So let’s assume that in 2020, you invest the full $69,500 into your TFSA.
In one scenario, you invest in fixed income. Your annual interest income, assuming a 3% interest rate, would be approximately $2,000. The tax savings will be up to $1,000. Under another scenario, let’s assume that you invest in dividend stocks. We will assume a 5% dividend yield, in which case the annual income would be approximately $3,500. Dividends are taxed less, but here too, the tax would be up to a maximum of 40%, or $1,400.
Whether we translate these tax savings into real life-changing benefits probably makes the difference as to whether we max out on our TFSA contributions. Imagine this amount compounded over five, 10 or 20 years. This begins to make a real difference in our wealth. It would be a shame to just give that away. The opportunity cost is quite big.
Reliable and generous dividend
TC Energy stock currently provides shareholders with a 4.42% dividend yield. This yield is not only generous, but it is also well-covered and it has grown significantly over the years. Since 2000, TC Energy’s dividends have increased every year at a compound annual growth rate of almost 7%. Looking ahead, we can expect continued growth. A reflection of management’s confidence in its future, they are forecasting an annual dividend growth rate of 8% to 10% through 2021.
Pipeline expansions to drive continued long-term growth for TC Energy
TC Energy has a dominant position in North America, with a growing position in Mexico and in the LNG industry. The company has more than $20 billion of projects under development. Keystone XL, which will provide a direct link to the U.S. Gulf Coast, the world’s largest heavy oil refining market, is one of the more well-known growth projects that TC Energy is undertaking. The NGTL System expansion, which will take growing western Canadian natural gas supply to markets within Canada, the U.S., and LNG markets, is another growth project that the company has undertaken.
Another important growth project is TC Energy’s fully permitted $6.2 billion Coastal GasLink Pipeline Project, which will provide direct access to the world market for Western Canadian Sedimentary Basin production. At this time, it is expected to be in service in 2023.
Environmental issues remain at the forefront
Along with all the good news, we have to also be cognizant of the not-so-good news and the challenges facing TC Energy. On October 29, the company’s Keystone XL pipeline suffered a major blow as the company detected a leak on the system. This is bad for the environment, bad for investor perception and acceptance, and bad for the future of the pipeline industry.
For its part, TC Energy is attempting to make this right. This spill has polluted wetlands in North Dakota, and the company temporarily closed down the pipeline in order to get a handle on the situation. While it has now reopened, this does not bode well for the company or for the perceived safety of pipelines in general. The spill is estimated to have leaked almost 10,000 barrels of oil.
Foolish bottom line
Although there is more uncertainty than we would like with TC Energy stock due to the Keystone XL spill, it remains a solid pick for 2020 with a well-covered dividend and a self-funded model until 2021.
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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 Karen Thomas owns shares of TRANSCANADA CORP.