The Tax-Free Savings Account (TFSA) is a fantastic vehicle to save money for a major expenditure or build retirement wealth. This one-of-a-kind savings account came into being in 2009 following the 2008 financial meltdown. It’s available to Canadian residents who are 18 or older and with a social insurance number (SIN).
Rising inflation in the current environment erodes real income. If you have a TFSA, its tax-free money growth feature can help preserve purchasing power. A small investment today can change a user’s precarious financial situation into a firmer one over time. Your TFSA balance could grow 10 times more with a suitable investment.
Power of compounding
The Canada Revenue Agency (CRA) sets annual contribution limits so all accountholders have contribution spaces yearly to build wealth. Canadian dividend stocks are ideal holdings in a TFSA to ensure tax-exemption of earnings or gains inside the account. U.S. and other foreign stocks are qualified investments but not advisable because their tax agencies impose a 15% withholding tax on dividends.
Since money growth is tax-free, the power of compounding works best in a TFSA. Most TFSA investors reinvest or use dividend earnings to buy more shares for faster balance compounding. The typical payout frequency on the TSX is quarterly, although some stocks, like Freehold Royalties Ltd. (TSX:FRU), pay monthly dividends.
The advantage of monthly income stocks is that you can reinvest the dividends 12 times a year, not four. Freehold is not an oil and gas producer but is North America’s leading energy royalty company. The $2.2 billion firm has sizeable land holdings in Canada and the U.S. and collects royalties from operators or drillers on its lands.
High-yield energy stock
Freehold Royalties is a dividend heavyweight for its high yield. At $14.58 per share, the yield is a mouth-watering 7.51%. Assuming you invest $1,000 (133.16 shares) in the energy stock today and hold it in your TFSA, the balance will grow to $10,184.28 without you doing anything except to reinvest in the dividends every quarter.
However, the annual TFSA contribution limit in 2023 is so much more than $1,000. If you can invest the maximum amount ($6,500 or 865.5 shares), your initial balance will compound to $10,185.84 in only six years. The example illustrates that you can build substantial wealth over time using your TFSA.
Dividend growth
Freehold Royalties’ longstanding objective is to deliver growth and lower-risk attractive returns to shareholders. The company achieves the goal by driving oil and gas development on its lands via leasing programs. Thus far, since 2021, dividend payments are rising.
The royalty stock raised its dividend twice in 2021, 25% in August, and 20% in November. Last year, in August, the dividend hike was 12.5%. While the Board has not announced an increase in 2023, it has approved and maintained a $0.09 dividend per share since the most recent hike.
Zero to hero
The key to turning your TFSA from zero to hero is to make regular contributions (maximize the limit if possible) and hold a reliable income. Everything follows when you reinvest the dividends: your holdings and payout increase while the balance compounds faster.
