If you want to grow wealth in a tax efficient manner, the TFSA (Tax-Free Savings Account) is your best bet. Any income (capital gains, interest, and dividends) earned from investments in a TFSA is completely safe from tax. Likewise, you don’t need to worry about taxes when you withdraw from the TFSA.
When you keep all your income (by paying no tax), you can really compound your capital over long periods of time. In fact, if you start investing in a TFSA early, save regularly, and invest in stocks of great quality businesses, you can build a significant nest egg for retirement. You will have to be incredibly patient and have a decades-long time horizon, but it is possible to 10X your wealth in a TFSA
A case study on Constellation Software stock
Here’s an example. In 2012, you could contribute a grand total of $20,000 to a TFSA. Say you put $10,000 of that into Constellation Software (TSX:CSU) at the start of 2012.
While Constellation was relatively unknown at a price of $80 per share, the company was doing all the right things. It was rapidly acquiring small niche software businesses at very high rates of return. Quarter after quarter it hit the mark. The one barrier is that its valuation has rarely been cheap.
Today, Constellation trades for a price of $2,666. That $10,000 TFSA investment would be worth over $342,000 today. That is a 33X return. Now that ride would not have been without dips and worries, but if you held on, the returns would have been exceptional.
TFI was another great TFSA bet
Say you put the other $10,000 into a somewhat more boring name like TFI International (TSX:TFII). Like Constellation, TFI has been consolidating a niche sector. While transportation is not an exciting industry, TFI has been buying up everything from small to large operators around North America.
Transportation is a cyclical business. Yet, TFI has had the operational and financial expertise to maximize profits from the industry. In 2012, you could have bought TFI for $13.50 per share. Today, it trades for $176 per share. Longstanding shareholders would be up 1,261% on this name. A $10,000 investment in 2012 would be worth $136,250 today.
Choose high quality growth stocks for your TFSA
Both stocks are considered very high-quality businesses. However, with respective market caps of $56 billion and $15 billion, the law of large numbers may somewhat limit their future upside.
If you want a 10-bagger in 10 years, you will need a roughly 27% annualized rate of return. That may be challenging to achieve, especially given where valuations stand today. Lower your annual return hurdle to around 17% (high, but possible), and you could potentially 10X your TFSA capital in 15 years.
A future multi-bagger?
One stock that could hit this threshold over the longer-term is Hammond Power Systems (TSX:HPS.A). Hammond provides specialized transformers and power solutions to utilities, data centres, EV charging stations, and manufacturers. It is a good bet on trends surrounding data and the electrification of society.
Hammond stock has been a monster in 2023. It is up 167% year to date. The company has consistently been delivering very strong earnings. Last quarter, earnings per share more than doubled over the course of a year.
Insiders are highly invested, so their incentives are aligned with shareholders. Lastly, it does not trade with an extreme valuation (a price-to-earnings ratio of only 15). Given its market cap of only $625 million, this stock could still deliver attractive mid-teen returns over the coming decades.
