There are strong benefits to both the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). Frankly, Canadian investors should have both. But when it comes to investing in these accounts, it can be tricky. What’s considered a good TFSA stock, and what’s a good RRSP stock?
Today, I’m going to cover just that. First, I’ll go over what should be considered when looking at a TFSA stock versus an RRSP stock. Then I’ll provide Motley Fool investors with some options to get started.
Image source: Getty Images
One TFSA stock
The benefit of a TFSA is that you can take out your cash any time, tax free. You can invest that cash and see it grow over time, but should an emergency happen, or you need to pay for costs before retirement, it’s available to you.
Furthermore, your returns and dividends made from a TFSA stock are tax free as well. Therefore, when it comes to finding a solid TFSA stock, you’ll want to get the most bang for your buck. Let’s say you filled up your contribution room but wanted to buy more shares. To stay within the rules, you’ll need to find companies that offer dividends.
If you want strong dividends that will also provide strong returns in the decades to come, then I would consider Canadian Imperial Bank of Commerce (TSX: CM)(NYSE: CM). Canadian bank stocks have continued to do well decade after decade, providing solid returns and dividends that continuously grow. CIBC is the perfect TFSA stock, because it dishes out the highest dividend of the bunch. Therefore, should you need cash soon, you’ll be making as much as possible from a stock like this.
As an example, CIBC stock boasts a compound annual growth rate (CAGR) of 7.1% over the last decade. Meanwhile, its dividend boasts a CAGR of 5.53% in that time. That would mean a $20,000 investment today, and adding $6,000 a year and reinvesting dividends, could be worth about $160,000 in just a decade!
One RRSP stock
An RRSP is different. Here, you’re investing for your retirement. So, you want to think very long term and not worry about any potential dips in the future. Furthermore, you also want dividends, but you don’t need to search for an RRSP stock with the highest yield. What you want is stability, so you can have a predictable path towards retirement.
In that case, the Big Six banks are great options. However, I wouldn’t put your retirement all in the basket of one bank. Instead, a great RRSP stock to consider would be a fund that offers exposure to all the banks.
In that case, I would consider BMO Equal Weight Banks Index ETF (TSX: ZEB). The name is just as it suggests — it aims to replicate the performance of all of the Big Six banks. Furthermore, you also get a dividend, which you can use to reinvest towards your retirement income.
This BMO ETF has risen steadily since coming on the market, providing stable income and returns as an RRSP stock. ZEB has a CAGR of 8% over the last decade and a dividend CAGR of 8.97%. That would make a $20,000 investment today, and adding $6,000 a year and reinvesting dividends, worth potentially $162,500 in the next decade! But given that it’s an RRSP stock, you’ll want to hold it longer. A 30-year investment could bring you over $2 million!
Bottom line
Canadian investors should know there is a difference when investing in a TFSA stock versus an RRSP stock. As you can see here, long-term growth can be achieved through dividends and stable returns. Adding your own consistent contributions could mean riches by the time you retire, while taking care of cash flow along the way.
