Investors seeking out a goal of $1 million by the time they retire need to have a consistent plan in mind. This plan needs to be well thought out with a financial advisor, rather than just having some arbitrary idea of aiming towards $1 million in savings.
However, if this does line up with part of your goals, there are certainly ways to achieve it. And one of the best ways to get there is by putting those investments in a Tax-Free Savings Account (TFSA).
Why the TFSA?
To be clear, I’m certainly not against investing for long-term savings in a Registered Retirement Savings Plan (RRSP). This should also be planned out with your financial advisor, and the RRSP has its own benefits — both short-term and long-term ones to consider.
But the TFSA is a great tool if you think you might need the cash sooner than you thought. Furthermore, you can take out that cash at any point without worrying about taxes. All you have to do is make sure you’re following the simple rules that go along with holding a TFSA, such as contribution limits that could lead to penalties.
Then the TFSA becomes a great way to put cash aside year after year. And when you invest it, that cash can add up to a $1 million in a relatively short period of time — especially when you invest in dividend stocks like these.
Consider these two stocks
The reason I choose dividend stocks is for the purpose reinvestment. You can use extra cash to reinvest in your dividend stocks again and again — shortening the time it takes to reach that $1 million mark. So, what are two stocks that could get you there?
I would consider companies that have achieved long-term payouts and have a strong future outlook. For this example, that would be Royal Bank of Canada (TSX:RY) and Canadian Utilities (TSX:CU). These are two safe dividend stocks that have grown steadily for decades, increasing their dividends year after year.
While Royal Bank stock might be down for now, historically it has recovered to pre-fall prices within a year of recession lows. As for Canadian Utilities, it does well no matter what the market does, as utilities are an essential part of every day life.
Combined, the pair have a compound annual growth rate (CAGR) 6% in share price as well as a CAGR of 7% for the dividend yield. That dividend averages out to 4% for these stocks. Using this information, let’s see how long it would take an initial investment of $30,000 to grow into $1 million. This will be while investing $6,000 each year and reinvesting dividends.
| Year | Principal | Annual Dividend | Yield | Yield On Cost | After DRIP Value | Principal Increase | New Balance |
|---|---|---|---|---|---|---|---|
| 1 | C$30,000.00 | C$1,218.12 | 4.00% | 4.06% | C$31,218.12 | C$1,800.00 | C$39,018.12 |
| 2 | C$39,018.12 | C$1,599.46 | 4.04% | 4.44% | C$40,617.58 | C$2,341.09 | C$48,958.67 |
| 3 | C$48,958.67 | C$2,026.18 | 4.08% | 4.82% | C$50,984.85 | C$2,937.52 | C$59,922.37 |
| 4 | C$59,922.37 | C$2,503.67 | 4.11% | 5.22% | C$62,426.04 | C$3,595.34 | C$72,021.38 |
| 5 | C$72,021.38 | C$3,038.02 | 4.15% | 5.63% | C$75,059.41 | C$4,321.28 | C$85,380.69 |
| 6 | C$85,380.69 | C$3,636.06 | 4.19% | 6.06% | C$89,016.75 | C$5,122.84 | C$100,139.59 |
| 7 | C$100,139.59 | C$4,305.46 | 4.23% | 6.52% | C$104,445.04 | C$6,008.38 | C$116,453.42 |
| 8 | C$116,453.42 | C$5,054.85 | 4.27% | 7.02% | C$121,508.27 | C$6,987.21 | C$134,495.48 |
| 9 | C$134,495.48 | C$5,893.96 | 4.31% | 7.56% | C$140,389.44 | C$8,069.73 | C$154,459.16 |
| 10 | C$154,459.16 | C$6,833.72 | 4.35% | 8.14% | C$161,292.89 | C$9,267.55 | C$176,560.44 |
| 11 | C$176,560.44 | C$7,886.45 | 4.39% | 8.76% | C$184,446.89 | C$10,593.63 | C$201,040.51 |
| 12 | C$201,040.51 | C$9,066.03 | 4.44% | 9.44% | C$210,106.54 | C$12,062.43 | C$228,168.97 |
| 13 | C$228,168.97 | C$10,388.10 | 4.48% | 10.18% | C$238,557.07 | C$13,690.14 | C$258,247.21 |
| 14 | C$258,247.21 | C$11,870.30 | 4.52% | 10.99% | C$270,117.51 | C$15,494.83 | C$291,612.34 |
| 15 | C$291,612.34 | C$13,532.53 | 4.56% | 11.87% | C$305,144.88 | C$17,496.74 | C$328,641.62 |
| 16 | C$328,641.62 | C$15,397.27 | 4.60% | 12.83% | C$344,038.88 | C$19,718.50 | C$369,757.38 |
| 17 | C$369,757.38 | C$17,489.87 | 4.65% | 13.88% | C$387,247.25 | C$22,185.44 | C$415,432.69 |
| 18 | C$415,432.69 | C$19,838.99 | 4.69% | 15.03% | C$435,271.68 | C$24,925.96 | C$466,197.64 |
| 19 | C$466,197.64 | C$22,477.02 | 4.74% | 16.29% | C$488,674.66 | C$27,971.86 | C$522,646.52 |
| 20 | C$522,646.52 | C$25,440.60 | 4.78% | 17.67% | C$548,087.11 | C$31,358.79 | C$585,445.90 |
| 21 | C$585,445.90 | C$28,771.15 | 4.83% | 19.18% | C$614,217.05 | C$35,126.75 | C$655,343.81 |
| 22 | C$655,343.81 | C$32,515.58 | 4.87% | 20.84% | C$687,859.39 | C$39,320.63 | C$733,180.02 |
| 23 | C$733,180.02 | C$36,727.01 | 4.92% | 22.67% | C$769,907.03 | C$43,990.80 | C$819,897.83 |
| 24 | C$819,897.83 | C$41,465.61 | 4.96% | 24.68% | C$861,363.44 | C$49,193.87 | C$916,557.31 |
| 25 | C$916,557.31 | C$46,799.58 | 5.01% | 26.90% | C$963,356.89 | C$54,993.44 | C$1,024,350.33 |
As you can see, after 25 years, by investing in these two stocks you would end up with over $1 million in your TFSA! While it may take some time and consistency, you can be sure this will remain a safe way to achieve riches by retirement.
