All investors should look to max out their Tax-Free Savings Account (TFSA) every opportunity they get. If that sentence doesn’t make sense to you, let me explain. Each year, Canadians are given a certain amount of contribution room into their TFSA. This is because all eligible contributions into a TFSA can be withdrawn, tax free, regardless of how much you can generate in returns. In 2023, Canadians were given $6,500 in contribution room.
If this is your first time hearing about a TFSA, then you could be in luck. Your contribution room accumulates every year since you turned 18. For example, an individual that turned 18 in 2009 or earlier would have $88,000 of contribution room available in their TFSA. In this article, I’ll discuss two top stocks that investors should buy for their TFSA today.
This blue-chip stock has been a major winner
If there’s one stock that investors should be looking at for their TFSA, that should be Constellation Software (TSX:CSU). That name may not be familiar to those that have just entered the investment scene. For those that don’t know, Constellation Software is a tech conglomerate that acquires vertical market software (VMS) businesses. This company is also known for helping its acquisitions become exceptional business units by providing the coaching and resources necessary to do so.
Since its initial public offering in 2006, Constellation Software has gained nearly 14,400%. That represents a compound annual growth rate (CAGR) of nearly 34%. Over that time, Constellation Software has needed to adapt its business in order to maintain its remarkable growth rate. In 2021, Constellation Software made a huge announcement when it stated that the company would begin targeting large VMS businesses. This is a massive shift from its previous strategy, because Constellation Software made a point to target small- and medium-sized VMS businesses.
It’s been a tough couple of years for tech companies in general, but Constellation Software has already shown signs of a bounce back. Year to date, Constellation Software stock has gained nearly 25%. If you’re looking for a proven growth stock to hold in a TFSA, it may be a good time to pick up shares of Constellation Software.
Don’t forget to include dividend companies
Imagine generating $40,000 a year tax free. That sounds pretty good, doesn’t it? Fortunately for Canadians, that’s completely achievable. However, something like that won’t be built overnight. In fact, unless you already have over $1 million, it likely won’t be built over two or three years. But it is achievable, and it all starts with choosing the right dividend stocks to hold in your TFSA.
Fortis (TSX:FTS) is a stock that could put you in the right direction to achieve those lofty goals. This company is well known among North American investors, because of its long history of raising its dividend. In fact, its 49-year dividend-growth streak ranks as the second-longest active streak in Canada. Due to the nature of its utility business, Fortis is able to plan for future dividend raises many years in advance. For instance, the company already stated that it will continue raising its dividend through to at least 2027.
If you’re able to buy shares today, you should be able to take advantage of a 3.79% forward dividend yield. In my opinion, investors should aim to buy shares of dividend companies that generate about a 4% dividend yield. That’s because a 4% yield on an investment of $1,000,000 would equate to $40,000 in dividends per year. Dividend stocks are crucial to balancing out a portfolio, and Fortis stands as one of the best around.
