A significant change for the Tax-Free Savings Account (TFSA) is a few days away. TFSA devotees are more excited as the size of the contribution limit has increased by $500 for the second year in a row. The 2024 TFSA dollar limit is now $7,000. Also, as customary, unused contribution room rolls over into the following year.
Unfortunately, not all users enjoy the full benefits of the TFSA, especially the tax-free money growth and tax-free earnings features. These material benefits go to waste because of a costly TFSA mistake. The tax-free investment account has existed for 14 years, but some users still do not utilize it properly.
The costly mistake
The investment flexibility of a TFSA is what makes it the vehicle to hit your short and long-term financial goals. Users can hold multiple investment types in a TFSA, including bonds, guaranteed investment certificates (GICs), mutual funds, exchange-traded funds (ETFs), and stocks.
Cash is never mentioned as an investment product because there’s no place for it in a TFSA. Unlike the income-producing assets mentioned above, there are no tax-free investment returns from cash you can keep. For example, your earning potential is greater if you use the bulk of contribution limit to purchase dividend stocks.
Besides the recurring income streams (quarterly usually), you can reinvest the dividends for faster principal compounding. Time flies fast, and you won’t realize you’ve grown a substantial TFSA balance over time.
The National Bank of Canada (TSX: NA) and Aecon Group (TSX: ARE) are among the solid options heading into the New Year. Both dividend stocks have market-beating returns in 2023, notwithstanding the elevated volatility and massive headwinds.
Big Bank stock
The Canadian Big Banks, including the sixth-largest, are rock-solid income providers to TFSA investors. At $100.01 per share, National Bank shareholders enjoy a 14.4% year-to-date return on top of the 4.24% dividend. On December 1, 2023, the $33.8 billion bank announced a 4% dividend hike from the previous quarter.
“Through strong execution, organic growth, and tight expense management, we delivered solid financial results, generated an excellent return on equity, and maintained robust capital levels in 2023,” said Laurent Ferreira, President and CEO of National Bank.
In Q4 fiscal 2023 (three months ending Oct. 31, 2023), net income increased 4% to $768 million versus Q4 fiscal 2022. Ferreira said the bank will maintain a defensive posture and bank on the earnings power of its business mix in fiscal 2024.
High-flyer
Aecon is a high flyer in 2023. At $12.01 per share, the year-to-date gain is 40%. If you invest today, the industrial stock also pays a juicy 6.16% dividend. A $7,000 investment will generate $107.80 in quarterly passive income.
The $741.9 million construction and infrastructure development company continues to win contract awards and infrastructure projects. The most recent is a US$200 million contract from Dominion Energy. Aecon also secured a $290 million design-build contract from the Ontario government.
According to its President and CEO, Jean-Louis Servranckx, Aecon is well-positioned to achieve solid revenue growth due to a growing backlog, robust demand, and recurring revenue programs.
Zero return
Holding cash in a TFSA is costly because it’s not an investment product. Besides losing the tax-savings benefit, the rate of return is negligible, if not zero.
