Tax-Free Savings Account (TFSA) investors constantly search for ways to get the best returns possible on their hard-earned savings.
TFSA benefits for young investors
The TFSA is a great tool for young investors. It provides more flexibility than the RRSP, as all the funds contributed to a TFSA are fully accessible without any withdrawal holdbacks.
Investors in the early part of their careers might also prefer to use the TFSA as the primary savings vehicle for retirement and keep RRSP contribution space for later when they are in a higher marginal tax bracket. Contributions to the RRSP reduce taxable income, so the benefit is greater when people have larger incomes. At the other end, the CRA taxes RRSP withdrawals. With a bit of careful planning, investors could be at a lower marginal tax rate when they pull the funds in retirement.
Interest, dividends, and capital gains earned inside a TFSA are tax-free, which means you get to pocket all the earnings on the investments when the time comes to spend the money.
Best stocks to build TFSA wealth
The best stocks for a buy-and-hold retirement portfolio tend to be companies that have long track records of dividend growth supported by rising revenue and strong profits. Savvy investors use the dividends to buy new shares, harnessing the power of compounding.
Let’s take a look at Bank of Montreal (TSX: BMO) (NYSE: BMO) and Canadian National Railway Company (TSX: CNR) (NYSE: CNI) to see how the strategy works.
Why Bank of Montreal is a great TFSA dividend stock
Bank of Montreal paid its first dividend in 1829. Investors have received a part of the profits every year since. This great track record should continue for decades.
Bank of Montreal survived every major financial and geopolitical crisis in the past 150 years and is navigating the pandemic in good shape. The bank reported solid fiscal Q1 2021 results. Net income rose 27% compared to the same period last year.
Bank of Montreal has a large U.S. presence, giving investors good exposure to American economic growth. The wealth management and capital markets operations provide a balanced revenue stream along with the personal and commercial banking business units.
Long-term investors have fared well with the stock. A $15,000 investment in Bank of Montreal 25 years ago would be worth $260,000 today with the dividends reinvested.
CN is a top buy-and-hold investment
CN is a leader in the North American rail industry. The company transports $250 billion worth of cargo every year across nearly 20,000 route miles of tracks. The network spans Canada from the Atlantic to the Pacific and runs through the United States to the Gulf Coast.
CN invests the capital needed to ensure it remains efficient and with the capacity to meet growing customer needs. As the economy recovers in Canada, the United States, and around the globe CN should continue to thrive.
The business is very profitable and CN has one of the best dividend-growth track records in the TSX Index over the past 25 years.
A $15,000 investment in CN when the stock went public in the mid 1990s would be worth close to $730,000 today with the dividends reinvested.
The bottom line on TFSA investing for retirement
The strategy of buying top dividend stocks and using the distributions to acquire new shares is a proven one for creating retirement wealth.
CN and Bank of Montreal are just two of the top TSX dividend stocks that deserve to be on your TFSA buy list.
