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TFSA Investors: 2 Stocks to Access the Power of Compounding and Accelerate Wealth Creation

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One of the most effective means of building wealth and achieving your financial goals is to invest in high quality dividend paying stocks with a long history of earnings growth, solid balance sheets, and wide economic moats.

By reinvesting those dividends in additional stock, you can unleash the power of compounding, thereby boosting returns and the speed at wealth is created.

By holding those stocks in a Tax-Free Savings Account (TFSA), it’s possible to remove the corrosive impact of taxes on investment returns because all dividends and capital gains are tax-free for the life of the investment.

The latest market rout, which sees the S&P/TSX Composite Index down by 3% since the start of 2020, has created an opportunity to acquire quality dividend-paying stocks at attractive valuations.

Here are two dividend stocks that belong in every TFSA.

Canada’s most international bank

Canada’s third-largest lender Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), which recently reported some solid fiscal first quarter 2020 results, has lost almost 4% over the last month.

Over the last decade, Scotiabank has built a substantial business in Latin America, seeing it ranked as a top 10 ranked bank in the Dominican Republic, Mexico, Colombia, Peru and Chile.

This has reduced its reliance upon the domestic economy and housing market while giving Scotiabank exposure to some of the fastest-growing economies in the region.

For the first quarter of 2020, Scotiabank reported a 5% year-over-year increase in earnings per share and a solid return on equity, a key measure of profitability, of 13.9%.

The strong performance of its Canadian banking, wealth management and capital markets operations offset a 4% year- -over-year decline in net income from international banking.

While Scotiabank’s short-term outlook appears poor due to the fallout from the coronavirus outbreak, it shouldn’t deter investors from adding the bank to their TFSA.

Over the last decade, Scotiabank has delivered a 119% return if dividends were reinvested, which equates to an impressive compound annual growth rate (CAGR) of just over 8%, which is significantly higher than the returns generated by cash or bonds.

The bank offers a dividend reinvestment plan (DRIP), allowing shareholders to use their dividends to acquire additional shares at no cost, which means they can unlock the power of compounding to enhance investment returns.

Integrated energy major

Canada’s largest energy company Suncor (TSX:SU)(NYSE:SU) has been hit hard by the oil price collapse and prolonged slump, losing 11% over the last month.

While the short-term outlook for crude bodes poorly for Suncor, it still possesses solid long-term prospects explaining why Warren Buffett has taken a sizeable position in the stock.

Suncor’s oil sands assets are low cost, long-life operations that saw the company report cash operating costs for its oil sands assets of $28.20 per barrel.

The integrated energy major’s growing production, which for 2019 expanded 6% year over year to 777,0000 barrels daily, will boost earnings and help make up for any shortfall in revenue caused by crude’s latest weakness.

For 2020, Suncor has forecast production growth of up to 8% compared to 2019 — to 840,000 barrels daily. When combined with its focus on controlling costs and maximizing the return on capital employed, it will bolster Suncor’s earnings.

Suncor’s integrated operations and ability to refine half of its annual oil production provides it with an important advantage over purely upstream drillers amid a difficult operating environment under pressure from sharply weaker crude.

While lower oil means cheaper feedstock for Suncor’s refineries, it can still charge a premium for the processed products that those operations produce.

This helps offset the impact of weaker oil prices on the profitability of its upstream operations and bottom line. For 2019, Suncor reported an impressive refining margin of $33.15 per barrel, highlighting the profitability of those operations.

Suncor’s appeal is enhanced by its regularly growing dividend, which management has hiked for the last 17 years straight to be yielding a juicy 5%, which, with a payout ratio of 90% is sustainable.

The energy major also offers a DRIP, allowing shareholders to reinvest their dividends to acquire additional stock and access the magic of compounding to bolster returns and the pace at which wealth is created.

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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 Matt Smith has no position in any of the stocks mentioned. The Motley Fool recommends BANK OF NOVA SCOTIA.

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