The Tax-Free Savings Account (TFSA) is one of my favourite things to discuss. The Canadian government introduced the account just over 10 years ago to help Canadian families save more.
While it is called a savings account, the TFSA is much more interesting. Your TFSA does more than just allow you to save money: it’s an investment vehicle that could help you accumulate a massive amount of wealth.
There are many strategies that you can use to help grow the balance in your TFSA over the years. The best way to increase your wealth is by leveraging a rising share price and dividend income that can both result in significant savings for your portfolio.
The maximum contribution room in your TFSA from 2020 is $69,500. If you use the entire contribution room to invest in a healthy dividend-paying stock like Toronto Dominion Bank (TSX:TD)(NYSE:TD), you can earn $2,821 each year through dividends that TD pays its shareholders. With the current dividend yield of 4.06%, it’s the best way for you to add a large amount of cash in your account every year.
Toronto Dominion offers you a great deal of stability for your portfolio. The bank has a decent payout ratio of 46.24% and robust fundamentals that make it possible for TD to pay you dividends without fail.
Unlike stocks with extremely high dividend yields that could be in danger of being cut, TD has a juicy dividend yield that the bank can consistently pay its shareholders.
Potential as a growth stock
You stand to earn a significant amount through Toronto Dominion’s dividend income over the years and accrue wealth, but that’s not the only good thing about it.
TD stocks also exhibit strong growth among Canada’s Big Five banking stocks. In 2019 alone, TD share prices grew almost 32% — a figure you wouldn’t usually expect from banking stocks.
When you maximize the contribution room to buy and hold TD stocks, you can expect huge returns from the stock’s capital gains over the years, besides the dividend income.
In the past 10 years, TD share prices have grown 121.71%, averaging out to a compounded annual growth rate of about 8.28%.
Assuming that TD follows the same growth pattern from the past 10 years, the $69,500 in your TFSA could grow to $507,800 in 25 years. While some investors might scoff at that, but if you keep maximizing the contribution room in your TFSA by investing in more TD stocks, you could have close to a million dollars in the same time period.
Foolish takeaway
Between the compounded annual growth rate, dividend income, and maximizing the contribution room in your TFSA by investing in more TD stocks, your portfolio can grow to well over $500,000 over 25 years.
TD could be an ideal investment to consider if you want to maximize the benefit you can get from your TFSA. Of course, don’t just invest in one stock though and diversify your holdings to further spread out your risk.
