The TFSA is a great tool to help Canadians build substantial savings for retirement.
How to use the TFSA to invest
Sticking money in a GIC is safe, but the returns are terrible these days. In fact, the big banks offer less than 1% right now. That won’t even keep up with inflation.
As a result, most investors are turning to stocks to help them boost returns on their hard-earned cash. The strategy of buying top stocks that pay dividends and using the distributions to acquire more shares is a proven one. RRSP investors used the approach for decades to create massive retirement portfolios. Since 2009, investors also have the TFSA as an investing option.
Inside the TFSA, all dividends remain tax-free, so the full value can be used to buy additional shares or parts of shares under a dividend-reinvestment plan (DRIP). The power of compounding takes some time to get going, but over the years the snowball effect can be significant.
When the time comes to spend the cash, all the capital gains are tax-free inside the TFSA. That means you can pocket all the money. This is different from the RRSP where you pay tax on withdrawals due to the reduction on taxable income when the initial RRSP contribution was made.
Motley Fool Canada Makes 5G Buy AlertClick Here to Learn More
A top Canadian stock to own for decades
CN has a wide moat, which means it enjoys sustainable competitive advantages. This is important when seeking buy-and-hold stocks. The railway is an essential component of the Canadian and U.S. economic engines and is the only company in North America with tracks connecting three coasts. The odds of new competitive lines being built along the same routes are pretty much nil. Imagine the challenge of trying to get approvals to cross all that private land.
CN still competes with other rail carriers and trucks along some routes, so management has to ensure the business is up to the task of meeting customer demands. CN invests significant funds to upgrade locomotives, add rail cars, and improve infrastructure.
The network connects major cities across Canada and runs right through the heart of the United States to the Gulf coast.
This rail business is profitable in both good and bad economic times. CN generates steady free cash flow and has delivered compound annual dividend growth of about 16% since is went public in the mid 1990s. That’s key for buy-and-hold TFSA investors.
Billionaires know the value of investing in railway companies. Bill Gates owns about 14% of CN’s common stock and Warren Buffett’s company owns its own railway outright.
The numbers explain why these guys love rail stocks. A $6,000 investment in CN just 20 years ago would be worth about $150,000 today with the dividends reinvested!
The bottom line on TFSA investing
A balanced portfolio is always recommended, and CN is just one top Canadian stock that deserves to be on your radar for a TFSA retirement fund. It takes patience and discipline, but investors can harness the power of compounding to build substantial wealth.
Catching new tech trends in the early innings of their growth can deliver massive gains for investors.
5G is one of the greatest arrivals in technology since the birth of the internet. We could see plenty of new wealth-building opportunities in 2021 that would potentially dwarf any that came before them.
5G has the potential to radically change our lives and society as we know it, but if you’re an investor, the implications are even greater — and potentially much more lucrative.
To learn more about it and its revolutionary potential to change the industry — and potentially your bank account — click on the link below to get the full scoop.
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.
David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway. Fool contributor Andrew Walker has no position in any stock mentioned.