Don’t wait to contribute to your Tax Free Savings Account (TFSA). You’d want to take advantage of the tax-free growth as soon as possible! This year, the TFSA limit is $6,500.
For some Canadians, $6,500 may be a lot to come up with all at once, especially when inflation has been relatively high. If so, aim to save and contribute regularly every month. It’d take about $541 a month to achieve $6,500 over 12 months.
For others, $6,500 may not seem much. Earning 8%, which is roughly the long-term average market return, equates to a return of only $520 a year. The Rule of 72 approximates that you can double your money to $13,000 in nine years on an 8% rate of return. However, your portfolio will grow much more quickly on contributions every year. This is powerful.
If you have been eligible for the TFSA since its inception in 2009 and you have never made any TFSA contributions, you would have $88,000 of tax-free room to grow your wealth this year! Again, based on an 8% return per year, an $88,000 TFSA would double to $176,000 in nine years.
Here are some dividend stocks that have delivered total returns greater than 8% per year since 2007. Consider them for your TFSA for long-term wealth creation.
Conservative investors would love Royal Bank of Canada (TSX:RY) as one of their core dividend TFSA holdings. The leading Canadian bank stock provides exceptional resilience in the space. It survived and thrived through the last two recessions, which began in 2008 and 2020, respectively. This is why we chose to backtest the stock performance since 2007.
The top bank stock delivered total returns of 9.5% since 2007. A good portion of its returns came from its safe and growing dividend. At $134.38 per share at writing, RBC stock is fairly valued and offers a dividend yield of north of 3.9%. For reference, its 10-year dividend-growth rate is 8.1%.
This year, economists are anticipating a mild recession. Therefore, investors might be able to pick up some quality RBC shares on a dip in their TFSA. If the stock heads south, investors can consider buying at about $128 per share and buying more at roughly $120. Those price points equate to dividend yields of about 4.1% and 4.4%, respectively, for starters.
Brookfield Renewable stock
Another dividend stock I like in my TFSA is Brookfield Renewable Partners (TSX:BEP.UN). Currently, it offers a cash distribution yield of 4.4% and provides a better value with the analyst consensus 12-month price target indicating a discount of about 19%. Other than being an undervalued stock, BEP also has incredible growth potential. Management projects global growth opportunities for decades.
According to Portfolio Visualizer, since 2007, the dividend stock delivered annualized returns of 14.6%. So, it doubled investors money in about five years. You’ll notice that the growth stock had a growth spurt from 2019 to early 2021, tripling investors’ money from price appreciation alone in that period. This suggests that the stock’s growth trajectory can be bumpy.
You can slow but surely win the race with regular TFSA contributions and investing in solid dividend stocks like RBC and Brookfield Renewable.