If you have a TFSA, then congratulations. You’ve made the single best decision you could make when it comes to financial planning. With tax-free growth and withdrawals, TFSAs are the best deal in Canada.
But having a TFSA is only the first step. Next, you need to build wealth through regular contributions and prudent investing. Fortunately, these actions are easier than most people realize.
In fact, going from $2,000 in your TFSA to $10,000 is a pretty straightforward endeavour. All you need is time, a bit of math, and the right stocks.
Do the math
There are only a few ways to increase your wealth. Most people know that contributing more money and earning a higher rate of return are big factors. The biggest factor, however, is time.
You’re likely familiar with compound interest. Einstein reportedly called it one of the most powerful forces in the universe. But compound interest only works with time.
Let’s assume you have $2,000 in your TFSA and never contribute another cent. By earning 8% per year, how quickly will it become $10,000? After five years, you’ll have $3,000. That’s not great. After 10 years, you’ll have $4,300.
Are you starting to see the magic of compound interest? Over the first five years, you made a profit of $1,000. Over the next five years, your profit totaled $1,300. Your money is growing faster the more that time passes.
In total, it will take 21 years to reach $10,000. That’s a long time, but here’s the catch: you can accelerate the process with small contributions.
What if you started with $2,000, earned 8% per year, but also contributed an additional $100 per month? That’s only $25 each week. In this scenario, it would only take five years to hit $10,000. That’s a lot better than 21 years!
Combining the power of compound interest with regular contributions is a sure-fire way to accrue a fortune. You just need to stay diligent.
Pick your stocks
How can you earn 8% annual returns? If you have a TFSA, one of your best options is pipeline stocks.
Pipelines are pure middlemen. They charge energy companies based on the volumes they transport. It doesn’t matter where commodity pricing goes, pipelines will profit all the same.
This stability allows pipeline stocks to pay industry-leading dividends that have proven resilient for decades.
Inter Pipeline, for example, pays a 7.7% dividend. Because these distributions are completely tax free in a TFSA, you can meet your invest goals through the dividend alone. Over the last decade, however, shares have also tripled in value. Continued capital gains would only accelerate your path to a $10,000 TFSA.
Enbridge is another ideal option with a dividend yield of 6%. As the largest pipeline company on the continent, Enbridge has structural cost advantages that few competitors possess. Its scale also affords it bargaining power. On new pipelines, Enbridge wants customers to agree to 10-year contracts. That should give it unparalleled cash flow visibility, fueling future dividend growth.
Set everything in motion
Going from a $2,000 TFSA to a $10,000 TFSA is simple. Run the math, establish a regular contribution schedule, and choose resilient dividend stocks like Inter Pipeline and Enbridge. Protecting these dividends from taxes is an opportunity you shouldn’t pass up. From there, all you need to do is wait.
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.
The Motley Fool owns shares of and recommends Enbridge. Fool contributor Ryan Vanzo has no position in any stocks mentioned.