In 2023, the TFSA (Tax-Free Savings Account) contribution limit was increased by $6,500. That’s $6,500 that can be invested without any tax consequence. Any opportunity you can get to invest with limited (or zero) tax consequence should be maximized.
Hold your best ideas in your TFSA
It’s a very smart play to put your best investment ideas into the TFSA. Firstly, you don’t get to claim capital losses in your TFSA. So, you only want stocks that are going to go up over time.
Secondly, the TFSA is the ideal place to hold stocks that can compound over years and decades. If you have a stock that could multiply many times over, you don’t want to pay any tax on those gains. You want to keep all those multiples of capital for yourself.
That is why it is a great place to hold high quality, steadily growing stocks. Here are two solid compounders that could seriously compound tax-free over the long term.
FirstService: A steady long-term compounder
Over the past five years, its stock is up 94% (a 14% compounded annual growth rate (CAGR)). Over the past eight years (since it came to the market), FSV is up 523% (a 24.7% CAGR).
This company provides property management services for multi-family properties, condos, and homeowners associations in Canada and the United States. This provides a very steady stream of predictable income.
However, in the past eight years, it has also been acquiring well-known brands that provide specialized property services. These include property restoration, home inspections, painting, flooring, and building systems maintenance.
While it is a top player in most of its markets, these are very fragmented markets. As a result, it has a large opportunity to keep adding great franchises to its fold. The company has a target to grow around 10%. However, that is likely modest given that it has superseded that rate in almost every year of its public history.
Constellation Software: A star TFSA stock
Another great stock for a TFSA is Constellation Software (TSX:CSU). Now, you would have to be willing to drop $2,785 per share to buy this stock. Even one share would take up a large piece of your TFSA contribution. However, it might be worth it.
Constellation has an excellent record of delivering for shareholders. This stock is up 192% (a 24% CAGR) in the past five years and 1,526% (a 31.9% CAGR) over the past 10 years.
Constellation makes its bread and butter operating and acquiring specialized, niche software businesses around the world. There are thousands of businesses in its investable universe. Despite its large size today, the software company continues to scale up the pace of acquisitions. It continues to earn strong returns on the capital it is deploying.
By owning Constellation stock, TFSA investors get to own a premium capital allocation platform. Meanwhile, Constellation has started spinning off some of its larger operating segments. Two years ago, it spun out Topicus.com, which is developing and consolidating software businesses specifically in Europe.
This year, it spun out Lumine Group, which has a specific focus on media and telecommunications software businesses. Both businesses have significant growth potential. Do your research, but both could make for good additions to your long-term TFSA portfolio as well.