The Tax-Free Savings Account (TFSA) is meant for Canadians to save regularly. It has a limit for each year that gets adjusted to inflation whenever it reaches a $500 interval. This year, the TFSA limit is $6,500, which means if you diligently saved since January, you could have saved and contributed about $541.66 each month to achieve the limit amount by the end of the year.
Eligible investments in the TFSA include cash, mutual funds, exchange-traded funds (ETFs), stocks, Guaranteed Investment Certificates (GICs), and bonds. Canadians can lock their money in GICs today for a 5% interest rate. To take it a step further, Canadians can invest in solid stocks to target higher returns to make their retirement dreams come true. After all, earnings made in the TFSA are generally tax free. Essentially, you would want to aim for the best returns based on your goals, risk tolerance, and investment horizon.
To invest for your unique retirement dream, you can consider these growth stocks for your TFSA portfolio aimed for a nice retirement decades later.
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Constellation Software stock
Constellation Software (TSX:CSU) is one of the best performers on the Canadian stock market. Its three-, five-, 10-, and 15-year total returns (with dividends reinvested) are approximately 25.2%, 26.6%, 35.9%, and 37%, respectively.
In the past decade, the top tech stock has grown its earnings per share eight-fold. In other words, the growth was roughly 23.3% per year, which was extraordinary. It also maintained high returns on equity in the past decade, which suggests the management is a great capital allocator. Its five-year return on equity is eye-popping at about 46%.
As a result, the stock hardly ever goes on sale, which means it may be smart to average into the stock every month with commission-free trading platforms like Wealthsimple that allow for purchases of partial shares. At $2,813 per share at writing, CSU stock is fairly valued, according to the analyst consensus 12-month price target.
CP stock
Railroad company Canadian Pacific Kansas City (TSX:CP) also generates high returns on equity. Its five-year return on equity stands at about 27.6%. Additionally, it generates ample free cash flow like Constellation Software.
CP stock’s three-, five-, 10-, and 15-year total returns (with dividends reinvested) are approximately 15.7%, 17.7%, 18.3%, and 16%, respectively. Although these returns aren’t as good as Constellation Software’s, it is still an outperformer of the market and provides diversification as a business that’s in an entirely different industry than Constellation Software.
CP’s merger with Kansas City Southern to expand its network into Mexico could drive higher growth in its profits via the surfacing value of the combined company, including potential cost-cutting opportunities. At $106 per share at writing, analysts believe the growth stock is discounted by about 10%.
More food for thought
Obviously, two stocks aren’t enough for diversification purposes. Investors should invest in stocks that are in different industries and have little correlation with each other for their diversified portfolios. Let’s say you’re able to save and invest $6,500 every year in your TFSA for a total return of 12% per year over 30 years. Your TFSA retirement nest egg would be worth $1,568,662.45!
