The Tax-Free Savings Account (TFSA) has numerous benefits but tax-free earnings and money growth are the standout features. Since account holders have new contribution room every year, an increase in the limit is most favourable.
The Canada Revenue Agency (CRA) capped the annual contribution limit from 2019 to 2022 at $6,000. However, the dollar limit in 2023 increased to $6,500 due to spiking inflation. For 2024, the annual TFSA limit increased again by $500 to $7,000, marking the first back-to-back increases on the tax-advantaged account.
Most TFSA users welcome the rise in the size of their contribution limit because the change in 2024 can make one richer. Also, a Canadian who has never contributed to a TFSA but is eligible to open an account since 2009 will have a cumulative contribution room of $95,000.
Eligible investments
Don’t let the term savings account deceive you because the TFSA is far from being a mere savings account. It’s a tax-sheltered basket where you can put various financial products. Any income-producing asset like bonds, mutual funds, GICs, ETFs, and stocks you house in the account enjoys tax-sheltered status.
Although many users opt for dividend stocks, investment choices depend on individual preferences and risk tolerance. The power of compounding comes into play when you reinvest the dividends. Your TFSA balance grows faster because all earnings in the account are tax-free.
Among the safer choices of reliable dividend-paying companies today are Emera (TSX:EMA) and Pembina Pipeline (TSX:PPL). Both companies provide competitive dividends to shareholders (average yield is 5.835%).
Solid business growth
Emera is a dividend aristocrat owing to 16 consecutive years of dividend increases. The $13.6 billion energy and services company has a dividend growth target of 4% to 5% through 2026. If you invest in this utility stock today, the share price is $49.43, while the dividend yield is 5.81%.
Given the regulated electric and natural gas utilities and critical natural gas pipelines, the business is low-risk. Through its various companies, Emera distributes electric power and natural gas to residential, commercial, and industrial customers in Canada, the U.S., Dominica, Barbados and the Bahamas.
“Continued strong operational performance across Emera is helping to offset the headwinds of higher interest costs,” said Scott Balfour, Emera’s president and CEO. The $8.9 billion three-year capital plan will deliver solid business growth and support the dividend growth guidance.
Milestone deal
Pembina Pipeline’s diverse and integrated assets have consistently delivered profitable growth. Pursuing opportunities to enhance long-term shareholder value is ongoing. At $45.55 per share (+5.40% year to date), the dividend yield is 5.86%.
The $25 billion energy infrastructure company will soon cement its position as North America’s top natural gas transporter. Pembina will fully own Enbridge’s joint-venture interests in Alliance Pipeline, Aux Sable, and NRGreen in the first half of 2024.
Market analysts say the $3.1 billion deal is a milestone in the energy sector. For Pembina, the expansive acquisition should significantly boost its growth and profitability for decades.
Powerful tool
The $7,000 limit isn’t small for a powerful investment tool like the TFSA. Assuming an equal allocation in Emera and Pembina Pipeline, the amount compounds 319% to $22,297.63 in 20 years, including dividend reinvestment. You can build a fortune over time if you max out your yearly limit.
