TFSA Wealth: How Canadians Can Turn $20,000 Into $290,000 — and Pay No Tax!

Canadian investors face some challenges when it comes to building a retirement fund.

Company pensions used to take care of the bulk of retirement planning, but businesses are moving away from defined benefit pensions for new employees. In fact, getting a full-time job is difficult enough, let alone finding one that comes with any benefits at all.

When young professionals finally land that ideal position, the pension arrangement is normally a defined contribution plan in which the employees have a percentage of their wages allocated to a pension fund and the company kicks in a matching amount.

Some of these plans are generous, but the risk is shifted to the employee as the retirement payouts are determined by the performance of the invested funds, rather than being guaranteed by the company.

Alternatives?

One benefit younger Canadians have that wasn’t available to their parents or grandparents is the Tax-Free Savings Account (TFSA). It launched in 2009 and the cumulative contribution limit per person is now as high as $69,500.

Any earnings generated inside the TFSA can go straight into your pocket. That’s right, the CRA doesn’t take a share of any interest, dividends, or capital gains.

The attraction for couples and families is that they can invest in dividend stocks inside the TFSA and use the full value of the distributions to buy new shares, triggering a snowball effect that can turn reasonably small investments into large gains over time.

Let’s take a look at two top Canadian stocks that have generated great returns and should continue to be attractive picks for TFSA investors.

Royal Bank of Canada

Royal Bank of Canada (TSX: RY)(NYSE: RY) is Canada’s largest bank and the biggest company in the TSX Index by market capitalization.

The firm has endured every major financial crisis in the past century and continues to be a leader in the industry. The bank has a balanced revenue stream coming from several business segments and across a vast geographic base.

Royal Bank is investing in new technology to ensure it remains competitive in the digital age and continues to generate strong profits.

A $10,000 investment in Royal Bank 20 years ago would be worth $140,000 today with the dividends reinvested.

Enbridge

Enbridge (TSX: ENB)(NYSE: ENB) is North America’s largest energy infrastructure company, with oil and natural gas pipelines that cross Canada and the United States.

The company also has utility businesses that include natural gas distribution operations and is growing its renewable energy portfolio with solar, wind, and geothermal facilities.

Enbridge is targeting distributable cash flow growth of 5-7% per year in the medium term, and investors should see dividends rise annually along that trajectory.

The stock provides a 6.3% yield today, making it an attractive pick for income investors.

A $10,000 purchase of Enbridge Stock 20 years ago would be worth $150,000 today with the dividends reinvested.

The bottom line

The strategy of owning top dividend stocks and investing the distributions in new shares is a proven one.

While Royal Bank and Enbridge might not generate the same returns in the next two decades, they remain solid picks for a diversified TFSA retirement portfolio.

Several top stocks in the TSX have delivered similar gains and deserve to be on your radar.