This year’s Tax-Free Savings Account (TFSA) contribution room of $6,500 may not seem like a lot. Let’s say you earn annual returns of 8.19% — the 10-year average Canadian stock market return. The $6,500 will become $21,169.97 in 15 years.
The TFSA is designed for Canadians to regularly save and invest. If you save and invest $6,500 per year over the next 15 years for 8.19% in your TFSA, you’d have built a nice nest egg of $193,790.44. Of the amount, $97,500 came from your savings.
Moreover, you’d be happy to know, the TFSA contribution room adjusts to inflation in $500 increments. This means more room to make tax-free returns.
Here are some top stocks that you should consider investing using your TFSA room as soon as possible.
Big U.S. bank stocks
It’s not at all odd to buy U.S. stocks in your TFSA. Right now, big U.S. bank stocks could be on sale, as they have sold off with the Silicon Valley Bank fallout. Particularly, Wells Fargo (NYSE: WFC) stock has declined about 20% in the last month. It now trades at a discount to its book value.
Assuming its fair value is 1.2 times book, the stock could trade at about US$50.22 per share on a recovery over the near term. In fact, analysts are even more optimistic, as their consensus 12-month price target is US$52.67.
WFC Price to Book Value data by YCharts
At US$37.38 per share at writing, it means the stock can appreciate 34-41% over the near term. As well, the investment-grade BBB+ S&P credit rating stock offers a dividend yield of 3.2%. Inside the TFSA, there would be a U.S. withholding tax of 15% on the dividend, resulting in an effective dividend yield of about 2.7%. However, the primary focus on the investment would be price appreciation. So, the withholding tax on the foreign dividend is negligible.
Brookfield Renewable
Brookfield Renewable Partners (TSX: BEP.UN) is an excellent buy-and-hold dividend stock in the TFSA for passive income and long-term price appreciation. It’s a diversified renewable power platform with 25 gigawatts (GW) of capacity across technologies and continents. Specifically, 53% of its capacity is from hydro power, 20% is from wind, and 15% is solar. It generates sustainable cash flows from long-term power-purchase agreements averaging 14 years.
Importantly, the dividend stock has outperformed the utilities sector. For example, its five-year returns were 19% versus the utility indexes of 9-10%. Moreover, it consistently increases its cash distribution. For reference, its 10-year cash-distribution growth rate is 5.7%. At US$31.51 per unit at writing, the stock yields 4.3% and trades at a discount of about 17%. So, over the next 12 months, it can potentially deliver total returns of close to 25%.
The latest news is that, along with its institutional partners, BEP is acquiring Australia’s largest, integrated power generation and energy retailer business that has a 24% market share! This acquisition provides BEP the opportunity to invest at least AU$20 billion to build up to 14 GW of renewable, storage, and firming capacity over the next decade to support the decarbonization of the electricity grid in the country.
Assuming no valuation expansion, a conservative estimate of long-term total returns in the top renewable stock is 9.3%. If this return were to materialize for the next 30 years, an initial $6,500 investment would transform into $93,652.25!
