The Tax-Free Savings Account (TFSA) is my favourite taxpayer benefit. The program is simple, elegant, and extremely useful for a long-term investor like me. Of course, it’s also wildly popular. According to the Canada Revenue Agency (CRA), Canadians collectively held $276.7 billion in their TFSAs in 2017.
That means nearly 12% of the nation’s annual income has been set aside to invest in stocks and bonds without any tax consequences. However, there’s also $30,947 in unused TFSA room per eligible taxpayer. If you have some contribution room left or have already deployed $10,000 in your TFSA, here’s how to leverage this lucrative program.
How to use your TFSA
Depending on your investment objectives, there are two ways to use the TFSA: for income or growth. Since there are no taxes on capital gains from investments in a TFSA, most young investors prefer to deploy this capital in aggressive growth stocks. Meanwhile, there’s also no taxes on dividends generated within a TFSA, so some investors prefer dividend stocks.
Of course, neither strategy will work if you don’t maximize the TFSA contribution room you have at your disposal. Take the time to log into your CRA account and check how much room you have left. Then you can deploy more cash into one of the top TFSA stocks mentioned below.
Top TFSA stocks
As mentioned, high-yield dividend stocks and high-growth stocks are well suited to the TFSA. Here are two picks from each category.
While Canada’s wireless services are atrocious and expensive, the business is unbelievably lucrative. The top three telecommunications companies control a majority of the market. This gives them unlimited pricing power in an industry that has become essential over the past 10 years.
BCE (TSX:BCE)(NYSE:BCE) is the biggest of the lot. BCE stock is only down 7% year to date. Meanwhile, consumers are using more data than ever before since everyone is working or learning remotely these days. The company is also well positioned to benefit from the upcoming 5G wave.
However, the reason this stock is ideal for your TFSA is its attractive dividend yield. At the moment, BCE stock offers a 6% dividend yield. Assuming BCE’s dividends and stock price appreciate at 5% annually and you reinvest dividends, this stock could turn $10,000 into $105,000 within 22 years.
If you’re looking for a reliable growth stock for your TFSA, enterprise software giant Constellation Software (TSX:CSU) is probably your best bet. The stock is up 900% since 2013. This means a $10,000 investment seven years ago would be worth $100,000 today.
There’s a good chance the company can repeat this in the next 10 years also. Constellation’s growth is driven by acquisitions. The management team has a peerless track record of targeting small niche software providers. Over the past three decades, they’ve acquired over 300 such firms.
There’s plenty of room left for growth in this arena. That makes Constellation Software an ideal bet for TFSA investors.
TFSA investors could target growth stocks like Constellation or dividend stocks like BCE to turn $10,000 into $100,000.
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Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Software.