The TFSA (Tax-Free Savings Account) is an excellent tool for securing your retirement. With the TFSA, you get to contribute, invest, and earn income and gains without any requirement to pay tax. There is no reporting income for tax purposes, and you don’t have to pay tax when you withdraw funds from the account.
As a result, the TFSA is a wonderful account to compound wealth over long periods of time. When you don’t pay tax, all income can be re-invested. You can increase your long-term returns by as much as 10-20% annually by simply saving on tax and reinvesting that back into stocks.
If you want to secure your retirement, your best bet is to start early and to contribute regularly (every TFSA contribution increase). The last point is to pick stocks in your TFSA that generate strong earnings growth and high returns on capital.
A business that can steadily and consistently compound its capital can often do a better job multiplying your wealth than you can. Buy a mix of these great businesses and hold on for dear life, and you could be set for retirement one day. Here are two top TSX stocks that would be ideal for any long-term TFSA investors.
Topicus.com: A new TFSA compounder
Despite its market cap of $8.9 billion, Topicus.com (TSXV:TOI) is not a very well-known technology stock in Canada. However, many will likely recognize its parent company, Constellation Software, which has delivered exceptional returns for shareholders over the years.
Topicus mirrors Constellation’s model of acquiring and operating vertical market software (VMS) businesses. However, it operates completely in Europe. Like Constellation, Topicus earns high returns on invested capital (over 30%). This means that it can generally earn back its money on investments in 2.4 years or better.
This TFSA stock is not cheap by any means. However, it is a stock you want to own for a business reinvesting and compounding at high rates of return for long periods.
TFI International: A great TFSA stock
TFI International (TSX:TFII) has delivered compounded annual total returns of 29.5% and 22.5%, respectively, over the past five and 10 years. This TFSA stock is one of Canada’s largest courier, freight, and logistics businesses. It has over 80 operating companies under its fold.
TFI has grown by consolidating a very scattered transport network across North America. Last year, it had a return on capital employed of over 19%. Transportation is a cyclical and low-margin industry. However, if you find a top player in a mediocre, fragmented industry, you can do very well.
2023 has been a tough year for TFI, as freight volumes have declined and recessionary fears have pushed the stock down. Yet industry valuations are likely to come down. That means TFI has plenty of opportunities to add more quality transport businesses to its portfolio.
Right now, you can buy this stock for 15 times earnings. If you can be patient through a recession, this stock could emerge even stronger over the long term.
The Foolish takeaway
Stocks with great managers, high returns on capital, and large markets to consolidate are perfect for any TFSA investor targeting retirement. Look for early-stage stocks like Topicus.com or those with great long-term track records (like TFI) to grow your capital quickly and efficiently.