The Tax-Free Savings Account (TFSA) is one of the best tools for compounding wealth over long periods of time. Any investment made inside the TFSA is safe from tax consequence. A Canadian investor can drastically improve their overall returns by simply not paying tax.
The TFSA is an incredible place to compound wealth
Over decades, what you save on tax can be re-invested and compound into a life-changing amount of wealth. By contributing regularly, investing regularly, and picking high-quality businesses that can compound their earnings and returns, it is possible to multiply and even 10X your wealth. Let’s look at a few different scenarios where a 10x has been possible in Canada.
Constellation: Up over 18X in a decade
Say in 2013, you had $10,000 saved inside your TFSA. For context, the full contribution limit in 2013 was $25,500. If you put that $10,000 into Constellation Software (TSX: CSU), it would be worth $182,231 today! If you re-invested your dividends, that investment would be worth $194,075!
That is a 34.4% annual average return and a 1,840% total return! Constellation is an exceptional company. It has utilized the power of compounding to buy many small, niche software businesses, reap their cash flows, and re-invest into more software businesses. Even after such phenomenal results, the company continues to re-invest capital at very attractive rates of return.
Constellation is a great example of company with a very shareholder-friendly management team, a large growth opportunity, and an extremely smart strategy. Let these types of companies compound your capital for you, and the results can be incredible.
goeasy: A TFSA stock for value, income, and growth
Another stock that has generated exceptional returns is goeasy (TSX: GSY). Even to this day, this not a well-recognized stock. Yet, if you had put $10,000 of TFSA cash to work in goeasy a decade ago, it would be worth $130,876 today.
If you re-invested all the dividends it paid along the way, your investment would be worth $148,321 right now. That is even after the stock has been cut in half since its peak in 2021.
Mainstream banks have been pulling out of the non-prime lending market. As a result, goeasy has been able to swipe up market share and significantly grow its lending book across Canada.
Right now, the market is pricing a severe recession into this stock. You can buy it with a 3.5% dividend yield and for a price-to-earnings (P/E) ratio of only eight times. While there are risks to factor in your due diligence, if you can think long term, this TFSA stock looks like a bargain and could still have ample growth ahead.
TerraVest: An underfollowed compounder
Another under-the-radar stock that would have been a successful pick for your TFSA is TerraVest Industries (TSX: TVK). $10,000 investing in TerraVest in 2013 would be worth $105,000 today. Re-invest the dividends it paid, and it would be worth $137,850!
Despite its brilliant 1,278% total return, this stock only has a market cap of $482 million today. Unlike the other two multi-billion-dollar stocks above, Terravest could still have significant opportunities to multiply wealth.
TerraVest provides specialized products and services for the Canadian energy sector. Energy service companies have been beaten down over the past few years. TerraVest has been able to consolidate several businesses at attractive returns.
Despite its great track record, this TFSA stock only trades for a P/E of 10. It also has a nice 1.8% dividend yield. For a stock with an attractive valuation, a great history, and many opportunities for growth, this could be a stock that 10X’s your money in the years ahead.
