TFSA Investors: How to Turn a $6,500 Contribution (and Some Patience) Into $50,000

Here’s how you can turn a $6,500 TFSA contribution into $50,000 over time by investing in a combination of growth and dividend stocks.

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Tax-Free Savings Accounts, or TFSAs, are among the most flexible registered accounts in Canada. It is a tax-sheltered account, which means any withdrawals in the form of dividends, capital gains, and interests are exempt from federal or provincial taxes.

But investors should remember that the TFSA contribution room is limited to $6,500 in 2023. However, the maximum cumulative TFSA contribution room has increased to $88,000 this year.

It’s crucial to make every dollar count and ensure you generate market-beating returns consistently over time. So, let’s see how you can grow a $6,500 contribution to $50,000 or more in the long term. Here are two strategies to help you achieve this financial goal.

Strategy #1: Invest in growth stocks

Stock market investors are always on the hunt for “multi-bagger” investments. Generally, a stock that delivers a return of 1,000% is considered a multi-bagger. While these returns are not impossible, only a handful of stocks have the potential to generate exponential gains.

One such potential multi-bagger stock is Datadog (NASDAQ:DDOG), which offers a cloud-based platform to enterprises. Valued at a market cap of US$24.6 billion, DDOG stock is trading at a discount of 61% compared to all-time highs. Its solutions include cloud monitoring, analytics, and enterprise security, which suggests the company is part of several high-growth markets.

Despite a sluggish macro environment, Datadog is on track to end 2023 with revenue of US$2.1 billion, an increase of 24.9% year over year. Wall Street also forecast adjusted earnings to touch US$1.15 per share, up from US$0.98 per share in the year-ago period.

Analysts expect Datadog’s top line to accelerate by 61.4% to US$3.4 billion in 2024, while adjusted earnings are estimated to expand by 29% annually in the next five years.

Priced at 49 times forward earnings, Datadog stock trades at a premium. But DDOG stock is trading at a discount of almost 30%, given consensus price target estimates.

Strategy #2: Dividend reinvestment

A second investment strategy is to buy shares of blue-chip dividend stocks such as Enbridge (TSX:ENB). Due to a predictable stream of cash flows, Enbridge currently offers investors a tasty dividend yield of 6.6%. These payouts have risen by 10% in the last 28 years, which is exceptional for a company part of the highly cyclical energy sector.

The dividends paid can be reinvested to buy additional shares of Enbridge, which, in turn, increases your dividend payouts at a stellar rate. After adjusting for these reinvestments, ENB stock has returned over 1,000% to shareholders in the last two decades.

Enbridge continues to expand its asset base, driving future cash flows and dividends higher. It remains on track to increase dividends between 3% and 5% each year through 2024.

The Foolish takeaway

Investors should understand that it takes a tremendous amount of patience and discipline to turn $6,500 into $50,000. For instance, in the last 20 years, you would have witnessed a dot-com bubble, a financial crash, the COVID-19 pandemic, and the ongoing period of elevated inflation levels.

Each of these events has driven the valuations of companies across sectors significantly lower. But it’s impossible to time the market, which means you need to keep faith in your strategy and regularly invest in quality stocks to build wealth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has positions in Enbridge. The Motley Fool recommends Datadog and Enbridge. The Motley Fool has a disclosure policy.

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