Canadian investors want to get the best returns possible on their TFSA investments. History suggests that owning top dividend stocks and using the distributions to buy new shares can be a winning strategy.
Best stocks for a TFSA
The TFSA is a great vehicle for investors of all ages. Retirees can take advantage of the TFSA to generate tax-free income that doesn’t put OAS pensions at risk of an OAS clawback. Younger investors can generate significant tax-free capital gains on rising stocks.
Recent rallies in BlackBerry stock and GameStop stock attracted traders hoping to profit on a short squeeze. It is certainly possible to make big money in a few days if you get the timing right, but this strategy is more akin to gambling than investing.
Seasoned investing professionals would advise making investments based on fundamentals. Look for great companies with leadership positions, wide moats, and strong track records of dividend growth. This strategy can also produce significant gains in a TFSA portfolio. Interestingly, two top Canadian dividend stocks now offer great entry points.
Why Canadian National Railway is a top stock to buy for a TFSA
Canadian National Railway (TSX:CNR)(NYSE:CNI) operates a vast network of rail lines that connects the Pacific and Atlantic coasts in Canada and the Gulf of Mexico in the United States. The company invests billions of dollars every year to ensure it remains a leader in the industry.
CN generates solid free cash flow in both strong and challenging economic times. This has led to a steady stream of annual dividend increases over the past 25 years. In fact, CN just raised its dividend by 7% for 2021. The board hiked the payout by a compound annual rate of about 16% since the company went public.
The CEO says Q1 2021 presents some challenges to the sector, but the outlook for full-year 2021 remains positive. The stock recently pulled back from record highs, giving investors a chance to buy CN on a rare dip.
A $3,000 investment in CN stock just 20 years ago would be worth more than $65,000 today with the dividends reinvested.
How Enbridge stock made some investors rich
Enbridge (TSX:ENB)(NYSE:ENB) is a giant in the energy infrastructure industry. The company moves 25% of the oil produced in Canada and the U.S., as well as 20% of the natural gas used in the United States. Global oil demand for the production of gasoline will continue to increase until emerging economies have the electricity infrastructure in place to ensure reliable power sources to charge electric vehicles. In addition, it will be years before airlines can efficiently operate planes without using traditional jet fuel.
On the natural gas side, the switch from coal to gas for power generation continues around the world. Canada and the United States have abundant gas resources and growth in the liquified natural gas sector should support the industry for decades.
Enbridge’s renewable energy investments continue to grow and will play a larger part of revenue generation in the coming years.
The stock appears oversold right now, providing TFSA investors with a chance to buy Enbridge at a nice discount. The dividend should grow in step with anticipated gains in distributable cash flow of 5-7% per year. The current payout provides a 7.5% dividend yield.
A one-time investment of $3,000 in Enbridge stock 25 years ago would be worth $83,000 today with the dividends reinvested.
The bottom line on TFSA investing
The strategy of buying top dividend stocks and using the distributions to acquire new shares is a proven one for creating wealth. It requires patience and discipline, but young investors can generate significant gains on modest initial holdings.
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 and Enbridge. The Motley Fool recommends BlackBerry. Fool contributor Andrew Walker owns shares of Enbridge and Canadian National Railway.