The TFSA (Tax-Free Savings Account) is one of the most powerful tools for efficiently compounding wealth over a lifetime. The CRA (Canada Revenue Agency) introduced the TFSA to help Canadians accumulate and build wealth reserves for retirement.
No tax on all income earned or withdrawn in the TFSA
The TFSA is the only CRA-registered account where all income (capital gains, dividends, or interest) earned and/or withdrawn from the account is tax-free. By keeping all the tax, you would normally pay, you can accumulate and compound wealth much faster inside the TFSA.
Unfortunately, many Canadians waste the TFSA as a mere savings account. Top Canadian banks promote high-interest TFSAs. However, often their interest rates are sub-standard at best, and they are often only for a short promotional period. Over the long term, their returns will significantly lag, especially when compared to soaring inflation.
Earn the best returns possible to maximize a TFSA over the long term
When you only earn minimal interest income within a TFSA, you are hardly maximizing its tax-free benefits. If you are saving for retirement and have a long investment horizon, your best bet is to invest your capital within a TFSA.
It doesn’t matter if it’s an ETF (exchange-traded fund), an index, or a portfolio of individual stocks (or a combination of all the above); just invest. Investments in stocks (and great businesses) tend to rise and even outperform inflation over time.
Buying stocks in great companies at fair prices can be an exceptional formula for building long-term wealth in a TFSA. Fortunately, when you need to sell and use the investment funds in a TFSA, there will be no nasty tax bill at the end.
If you are wondering about great stocks for a TFSA, here are two that could be great long-term investments.
A boring industry and an exceptional business
TFI International (TSX: TFII) is a top-class operator in a bland industry. TFI is one of the largest less-than-truckload freight carriers in Canada. It is amongst the top six carriers in the U.S.
Generally, trucking businesses are low-margin and capital-intensive businesses. However, TFI has a “secret sauce” that involves consolidating smaller carriers, unlocking efficiencies, reducing risk, and elevating earnings returns.
TFI has grown earnings per share by around 20% a year for the past decade. Its stock has delivered a 767% total return (24% compounded annually) in that time.
If you put $10,000 TFSA cash into TFI stock a decade ago, it would be worth over $84,000 today. Despite its track record, this stock trades for a pretty reasonable 15 times earnings today.
A retailer with outstanding long-term returns
Another great company for any TFSA is Alimentation Couche-Tard (TSX: ATD). Like TFI, it happens to be headquartered in Quebec. While in a completely different industry, ATD has a similar strategy to TFI.
Couche-Tard consolidates convenience stores and gas stations around the world. This is generally a bland industry. Yet, Couche-Tard has used the power of branding, technology, and scale to generate tonnes of excess cash.
It has been taking that cash and re-investing into more innovative services, more convenience locations, buying back stock, and acquiring well-located portfolios of gas stations globally.
This TFSA stock has grown earnings per share by a 19% compound annual growth rate. Its stock is up 565% over the past 10 years.
A $10,000 TFSA investment in Couche-Tard stock in 2013 would be worth around $62,000 today. It trades for around 16 times earnings, which seems like a fair price for a great long-term TFSA compounder.
