Tax-Smart Investing: Unveiling the Top 3 Stocks for Canadian TFSA Investors

If you want to grow your wealth by investing, you need to be smart about taxes. Here are three smart stocks that could make solid TFSA investments.

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There is nothing better than “tax-free”, and that is what the TFSA (Tax-Free Savings Account) gives you. The TFSA is the only government-made account where you can save, invest, earn income, and pay no tax on the gains. Likewise, you don’t pay any tax on the cash that you withdraw from the account (like you do with the Registered Retirement Savings Plan (RRSP)).

Any chance an investor can get to save on tax should be an opportunity maximized. When you combine the tax rebate from the RRSP and total tax-free benefit of the TFSA, you can significantly grow and compound wealth over time.

If you are looking for great TSX stocks for any TFSA or RRSP, here are three that could have substantial upside.

A solid stock for dividends

Brookfield Infrastructure Partners (TSX:BIP.UN) is a leader in operating and investing in a diverse mix of infrastructure assets. This company is attractive for several reasons. Firstly, BIP.UN has a nice dividend yield of 4.3%. It has grown that dividend by high single-digit rates for more than a decade.

Secondly, it has incredibly high-quality assets. These assets are economically crucial and tend to operate a monopoly in their core markets. This year, it has announced several exciting acquisitions that will position it at the centre of the data revolution (data centres) and global supply chain (containers and ports).

For a dividend stock, it has delivered returns in the low teens for years. For tax-free income and steady growth, this is an excellent long-term TFSA stock to hold.

A TFSA stock for growth

Descartes Systems (TSX:DSG) is one of Canada’s best performing stocks over the past 10 years. Yet not many people have heard of Descartes. Since 2013, this stock has risen 729% for a 23.5% compounded annual return.

Descartes provides networks and software that support the global logistics industry. Descartes simplifies and streamlines a paper-heavy industry. Its software helps support the more efficient movement of goods globally.

This company is incredibly profitable (20%-plus net earnings margins), and has been growing by the mid-to-high teens for years. Unfortunately, it is not the cheapest stock you could own in a TFSA (47 times earnings).

However, given the potential for a transportation recession, this stock could pull back this year. That could create a good buying opportunity. In the meantime, the company is cash rich with no debt. It could meaningfully deploy capital into acquisitions should tech valuations start declining again. That could fuel elevated growth for the longer term.

A top TFSA stock for value

Another great long-term stock for a TFSA is BRP (TSX:DOO). The company creates some of the most innovate all terrain, off-road, and marine vehicles in the world. Its brands (Ski-Doo, Sea-Doo, and CanAm) are synonymous with fun. Over the past few years, the company has been capturing market share and expanding into new product categories.

BRP has manufacturing and design expertise. Likewise, its dealer network differentiates it from competitors. As a result, the company is one of the most profitable in its industry. The company has a been taking its excess cash and aggressively buying back stock. It has eaten up around 5% of its shares every year for more than five years straight.

Despite its successful execution, this stock trades for only 9.6 times earnings. That is below its five-year average of 13. Everyone is worried about a recession’s effect on this business, but the discount is a suitable margin of safety for a long-term TFSA investor.

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 Robin Brown has positions in Brookfield Infrastructure Partners, BRP, and Descartes Systems Group. The Motley Fool recommends Brookfield Infrastructure Partners, BRP, and Descartes Systems Group. The Motley Fool has a disclosure policy.

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