New Investors: How to Turn a $12,000 TFSA Into $350,000 in 25 Years

Young TFSA investors can use a popular and proven strategy to build substantial portfolios for retirement over the course of two or three decades. Here’s how it works.

| More on:
Female hand holding piggy bank. Save money and financial investment

Image source: Getty Images

The TFSA is a great tool to help young Canadian investors build a substantial portfolio for their retirement.

TFSA advantage

The TFSA limit increased by $6,000 for 2021. That brings the cumulative total contribution room to $75,500 for Canadian residents who were at least 18 years old when the TFSA began in 2009.

Saving $6,000 a year to put into the TFSA takes some discipline, but the payoff can be enormous. In fact, young investors can harness the power of compounding inside the TFSA to build a substantial fund with all profits remaining beyond the reach of the CRA.

A proven strategy to create investing wealth involves buying top dividend stocks and using the distributions to acquire new shares. The snowball effect is slow at the start but can eventually create a massive savings fund, especially when steady capital appreciation occurs alongside dividend growth.

Best stock to buy for a TFSA

The best TSX stocks to buy tend to have long track records of dividend hikes. These companies are often industry leaders and demonstrate solid profit growth supported by higher revenue.

Let’s take a look at Royal Bank of Canada (TSX:RY)(NYSE:RY) and Enbridge (TSX:ENB)(NYSE:ENB) to see how the strategy works.

Royal Bank

Royal Bank is Canada’s largest financial institution and one of the top 15 in the world. The bank survived every major geopolitical and financial crisis over the past 150 years. The pandemic is no different. Royal Bank earned $11.4 billion in profits in 2020 and just reported strong results for Q1 fiscal 2021.

With a CET1 ratio of 12.5%, the bank is sitting on significant excess capital. Investors should see a big dividend increase and a new share-buyback program announced as soon as the government allows Royal Bank and its peers to deploy the cash.

Long-term investors have enjoyed great returns. A $6,000 investment in Royal Bank 25 years ago would be worth $185,000 today with the dividends reinvested.

Enbridge

Enbridge is a leader in the North American energy infrastructure industry. It transports 20% of the natural gas used in the United States and moves 25% of the oil produced in the U.S. and Canada. The company also has natural gas utility businesses and renewable energy assets.

The energy sector is out of favour with investors, but oil and natural gas demand won’t disappear. In fact, it is expected to continue to grow from decades, despite the trend towards electric vehicles and renewable power. At the same time, getting new major pipelines built is a challenge, so the existing networks become increasingly valuable.

Enbridge generates strong revenue and anticipates steady growth in distributable cash flow. The stock appears cheap right now and offers a 7.8% dividend yield.

An investor who’d bought $6,000 worth of Enbridge stock 25 years ago would have about $165,000 today with the dividends reinvested.

The bottom line on TFSA investing

Royal Bank and Enbridge are industry leaders that should continue to deliver solid returns for decades. The TSX is home to several top stocks that have made buy-and-hold investors wealthy. The strategy of harnessing the power of compounding benefits young TFSA investors who have the time and patience to maximize their returns.

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 Andrew Walker owns shares of Enbridge.

More on Dividend Stocks

Female hand holding piggy bank. Save money and financial investment
Dividend Stocks

RRSP Savings: 2 Top TSX Dividend Stocks to Build Retirement Wealth

Here's how investors can turn small initial RRSP contributions into substantial savings for retirement.

Read more »

Man holding magnifying glass over a document
Dividend Stocks

2 BMO ETFs Are Less Volatile Than BMO Stock

Two ETFs of a big bank are more suitable for risk-averse or ultra-conservative investors than its stock.

Read more »

Target. Stand out from the crowd
Dividend Stocks

1 Cheap Dividend Stock to Buy as Recession Fears Rise

Great-West Lifeco (TSX:GWO) is an undervalued financial stock that looks like a great buy, even as the world economy tumbles…

Read more »

Profit dial turned up to maximum
Dividend Stocks

2 TSX Stocks Paying Over 5% in Dividends

Add these two blue-chip dividend stocks to your portfolio for wealth growth through shareholder dividends and capital gains.

Read more »

Business people standing near houses models
Dividend Stocks

2 REITs to Own as Rental Housing Demand Rise

Two prominent residential REITs should be on your buy list, as the rental housing market picks up due to rising…

Read more »

Retirement plan
Dividend Stocks

FIRE Movement: How to Retire Early Using Your TFSA

You can increase your financial independence and even retire early by investing in solid dividend stocks in your TFSA over…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: 2 Stocks to Buy Now for a Personal Pension Fund

RRSP investors can find top TSX dividend stocks at cheap prices today.

Read more »

Cogs turning against each other
Dividend Stocks

1 Passive-Income Stock to Counter Volatility

Looking for a stock that can counter volatility now and tomorrow? This stock is a reliable option for growth and…

Read more »