TFSA Users: 56% of You Are Making This Huge Mistake

Use the Tax-Free Savings Account to create a portfolio of growth stocks and benefit from outsized gains over time.

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According to a detailed report from the Bank of Montreal released in 2022, 56% of Canadians hold cash in their TFSA (Tax-Free Savings Account). Further, 29% stated cash accounts for at least 75% of their holdings. While TFSA is a popular registered account in Canada, around half of the country’s residents are not aware it can be used to hold both cash and several other investments.

For instance, you can hold asset classes such as equities, bonds, exchange-traded funds, and mutual funds in addition to cash in a TFSA.

You are losing the real value of your money

The benefits of the TFSA should be leveraged, and Canadians should instead consider investing in a diversified portfolio of asset classes. The main aim of investing is to outpace inflation and build long-term wealth. But just holding cash in the account will lead to a decline in purchasing power due to inflation.

For instance, if inflation for a current year is 5%, the value of $100 will decline to $95. So, you ideally need to invest in assets that generate returns that are higher than inflation.

Historically, equities have enabled long-term investors to benefit from the power of compounding and build generational wealth. Moreover, any returns derived in a TFSA are sheltered from Canada Revenue Agency taxes, making it a top account to hold growth stocks.

Two TSX stocks to hold in a TFSA

Valued at a market cap of $1.1 billion, Dentalcorp (TSX:DNTL) stock is down 68% from all-time highs. Dentalcorp acquires and partners with dental practices to provide health care services in Canada.

In the second quarter (Q2) of 2023, Dentalcorp reported revenue of $368.3 million, an increase of 12.6% year over year. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $67 million rose 11%, indicating a margin of 18.2%. The company ended Q2 with a net income of $35.5 million and free cash flow of $33.6 million.

Dentalcorp acquired six practices in Q2 for $5.6 million and is on track to end 2023 with $1.43 billion in sales. Comparatively, its bottom line is forecast to swing to earnings of $0.30 per share in 2024, compared to a loss of $0.12 per share in 2022.

Priced at less than one time forward sales and 20 times forward earnings, DNTL stock trades at a discount of 125% to consensus price target estimates.

Another TSX stock you can hold in a TFSA is Pet Valu (TSX:PET), the largest specialty retailer of pet foods and supplies in Canada. It recently announced the opening of a 670,000 square feet distribution centre in Brampton, Ontario, which is a key milestone in Pet Valu’s $110 million supply chain transformation.

Pet Valu expects the facility to bring scale and automation to the Canadian pet sector and lower costs over time. The company expects to increase adjusted earnings from $1.6 per share in 2022 to $1.83 per share in 2024. So, priced at 14 times forward earnings, PET stock trades at a discount of 60% to consensus price target estimates.

Due to its consistent profits, Pet Valu also pays shareholders an annual dividend of $0.36 per share, indicating a yield of 1.5%.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Pet Valu. The Motley Fool has a disclosure policy.

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