Young investors can take advantage of their Tax-Free Savings Account (TFSA) to build self-directed retirement portfolios of top TSX dividend stocks.
The TFSA limit is $6,500 for 2023. This brings the maximum cumulative total contribution room to $88,000 since the government launched the TFSA in 2009.
New investors in the early part of their careers might choose to start their retirement investing inside a TFSA and keep Registered Retirement Savings Plan (RRSP) room open until they move into a higher marginal tax bracket where contributions have a larger impact on reducing taxable income.
TFSA contributions are made with after-tax cash flow, but all the earnings generated by the investments are tax-free. One popular strategy for young investors involves owning dividend-growth stocks and using the dividends to buy new shares. This sets off a powerful compounding process that can turn a modest initial investment into a meaningful nest egg over time. When you decide to use the money, all the profits can go straight into your pocket!
Fortis (TSX:FTS) is a Canadian utility company with $64 billion in assets located across Canada, the United States, and the Caribbean. The stock has rebounded nicely off its 12-month low. More gains should be on the way as the Bank of Canada and U.S. Federal Reserve end their program of interest rate increases.
Fortis grows through a combination of strategic acquisitions and internal development projects. The current $22.3 billion capital budget is expected to drive steady rate base growth over the next five years. As a result, Fortis intends to raise the dividend by at least 4% annually through 2027. The board increased the distribution in each of the past 49 years.
Long-term investors have done well. A $10,000 investment in Fortis 25 years ago would be worth about $130,000 today with the dividends reinvested.
Canadian National Railway
CN (TSX:CNR) just reported record Q1 2023 results and increased its earnings guidance for 2023. The company’s rail network connects the Pacific and Atlantic coasts of Canada to the Gulf of Mexico in the United States. CN serves a strategically important role in the smooth operation of the economy, moving everything from crude oil, coal, cars, and consumer goods, to forest products, grain, and fertilizer.
CN has been able to pass rising costs through to customers in the past two years. This is important in the current era of high inflation. An economic downturn could slow demand for some of its services, but the other segments tend to pick up the slack when one group has a rough quarter.
CN’s dividend only offers a 2% yield, but the company’s dividend growth is one of the best in the TSX over the past 25 years with a compound annual dividend growth rate of better than 10%.
A $10,000 investment in CN stock 25 years ago would be worth about $320,000 today with the dividends reinvested.
The bottom line on top stocks to start a TFSA retirement fund
There is no guarantee Fortis and CN will deliver the same results in the next 25 years, but these stocks are good examples of how the power of compounding can build wealth. Both still deserve to be anchor picks for a self-directed TFSA pension fund focused on generating attractive total returns.