Canadian investors are taking advantage of the Tax-Free Savings Account (TFSA) limit each year to invest funds as part of their overall retirement planning program. One popular strategy for building retirement savings involves owning top TSX dividend-growth stocks and using the distributions to buy new shares.
TFSA limit 2024
The TFSA limit will increase to $7,000 in 2024 from $6,500 in 2023. This will boost the cumulative maximum contribution space per person to $95,000 for anyone who has qualified since the inception of the TFSA in 2009.
TFSA room that is not used in a calendar year can be carried forward. In addition, the value of funds removed from the TFSA during the year will open equivalent new contribution space in the next calendar year. This provides good flexibility for people who might need to access funds for a short term to cover a big expense but will have new funds available in the near term to replace the investments.
All dividends, interest, and capital gains earned inside a TFSA are tax-free. This means the full value can be reinvested to grow the portfolio. In the case of dividends, many companies have a dividend-reinvestment plan (DRIP) that allows investors to use the dividends to buy new shares without incurring a transaction fee. In some cases, the DRIP also offers a discount on the share price.
During market corrections, the DRIP enables investors to buy new stock at discounted prices. This helps reduce the average cost while boosting the size of the holdings at a faster rate. Over time, investors want the share price to drift higher, but the DRIP strategy makes it easier to ride out the downturns.
Fortis (TSX:FTS) is a good example of a stock that has a long track record of dividend growth and offers a DRIP with a 2% discount on the shares purchased using the dividends. The board has increased the dividend annually in each of the past 50 years, and Fortis intends to raise the dividend by at least 4% per year through 2028.
The stock trades for close to $54 at the time of writing compared to more than $64 at the high point in 2022, so investors have an opportunity to buy Fortis on a decent pullback.
Fortis has been a good stock to own for patient investors who are building retirement portfolios. A $5,000 investment in FTS stock just 20 years ago would be worth more than $37,000 today with the dividends reinvested.
The bottom line on top stocks for dividends
Fortis is just one example of a top TSX dividend-growth stock that has made some buy-and-hold investors quite rich. There is no guarantee that the returns will be the same in the next 20 years, but Fortis still deserves to be on your radar.
The strategy of buying good dividend-growth stocks and using the distributions to acquire new shares requires discipline and patience, but it is a proven model for helping investors build long-term wealth.
