How to Turn a $10,000 TFSA or RRSP Into $220,000

Here’s how investors can harness the power of compounding to build retirement wealth.

| More on:
edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk

Image source: Getty Images

Canadian savers are using their Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) to build self-directed portfolios to fund a comfortable life in retirement. One popular investing strategy involves buying a diversified basket of top TSX dividend stocks and using the dividends to buy more shares through a company’s dividend-reinvestment plan (DRIP). This triggers a compounding process that can turn small initial investments into substantial savings over time.

DRIP benefits

Companies use a DRIP as a way to retain cash that would otherwise be paid out as dividends. The DRIP gives investors an opportunity to automatically buy more shares of the company without incurring a transaction charge. In some cases, the business provides a discount of up to 5% on the purchase price of the shares acquired using the DRIP. Each new share that is added subsequently increases the total dividend payout on the next distribution. The compounding process starts out slowly, but can have a major impact over time. It’s similar to the effect of rolling a snowball to build a snowman.

The best stocks to buy tend to be ones with long track records of steady dividend growth.

Enbridge

Enbridge (TSX:ENB) just reported solid third-quarter (Q3) 2022 results, extending a strong performance this year. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the quarter came in at $2.27 billion compared to $1.9 billion in the same period last year. For the first nine months of 2022, adjusted EBITDA was $6.58 billion compared to $5.62 billion in 2021.

The rebound in oil and natural gas demand is expected to continue for several years. Global buyers are keen to secure reliable supplies from Canada and the United States. Enbridge has extensive oil and natural gas pipeline infrastructure in the two countries and is investing in export assets to drive revenue growth. The company purchased an oil export terminal in Texas last year for US$3 billion. In addition, Enbridge has agreed to take a 30% stake in the $5.1 billion Woodfibre liquified natural gas (LNG) facility being built in British Columbia.

Enbridge is expanding existing natural gas pipeline networks to accommodate rising fuel demand and is also growing its renewable energy portfolio.

The secured capital program now stands at $17 billion. This should drive steady revenue and cash flow growth in the next few years.

Enbridge pays a quarterly dividend of $0.86 per share. That’s good for an annualized yield of 6.3% at the current share price. The board raised the dividend in each of the past 27 years.

Long-term investors have done well with ENB stock. A $10,000 investment in Enbridge 25 years ago would be worth $220,000 today with the dividends reinvested.

The bottom line on building retirement wealth

Enbridge is a good example of a top dividend-growth stock that has generated attractive total returns for investors who use the dividends to buy new shares. There is no guarantee Enbridge will deliver the same results in the future, but the stock still deserves to be part of a balanced retirement fund.

The TSX is home to many great dividend stocks that now appear oversold and look attractive to buy for a diversified TFSA or RRSP portfolio.

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 recommends Enbridge. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Enbridge.

More on Dividend Stocks

financial freedom sign
Dividend Stocks

Invest $300 Each Month in This Dividend Stock to Actually Create a $1 Million Portfolio

This dividend stock is the perfect option if you're looking for solid returns and passive income to actually create a…

Read more »

A meter measures energy use.
Dividend Stocks

3 Utility Stocks That Are Too Cheap to Ignore

Some utility stocks are priced too low to overlook. Here are three stellar options that every investor should consider buying…

Read more »

stock research, analyze data
Dividend Stocks

Rogers Stock Rose 10% in November: Is it a Buy Today?

Which is a better in the Canadian telecom sector: BCE or Rogers stock?

Read more »

Dividend Stocks

2 TSX Dividend Stocks Offering Big Income in a Bearish Market

A bear market is the time to buy dividend stocks and lock in long-term income. Here are two stocks that…

Read more »

FREIGHT TRAIN
Dividend Stocks

These 2 Dividend Payers Are Outpacing the TSX

Some leading TSX dividend stocks are outperforming the market. CN and ENB stock are two to watch.

Read more »

TFSA and coins
Dividend Stocks

Retirees: How to Earn Tax-Free Income in 2023 to Supplement Your OAS and CPP Payouts

These two high-yielding ETFs can help retirees meet their retirement income needs.

Read more »

HIGH VOLTAGE ELECRICITY TOWERS
Dividend Stocks

3 Canadian Utility Stocks for Passive Income

Canadian utility stocks have fallen and you can pick up serious bargains for passive income and growth. Here are three…

Read more »

TFSA and coins
Dividend Stocks

Passive Income: 2 Top TSX Dividend Stocks to Buy for a TFSA

These top TSX stocks pay growing dividends with attractive yields.

Read more »