TFSA Pension: How $20,000 Can Turn Into $335,000 in 25 Years

This investing strategy can deliver meaningful long-term returns.

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Canadians who are using their Tax-Free Savings Accounts (TFSAs) to build a retirement fund are wondering which top TSX dividend stocks might be undervalued and good to buy for a self-directed portfolio targeting long-term total returns.

Power of compounding

One popular investing strategy for building long-term retirement wealth involves buying quality dividend stocks and using the distributions to acquire new shares. The reinvestment of the dividend in new shares increases the size of the next dividend to buy even more shares. The snowball effect is small at the beginning of the process, but the impact can be substantial over the course of two or three decades, especially when dividend payouts increase at a steady pace and the share price drifts higher.

Many companies offer discounts of up to 5% on shares purchased through the dividend-reinvestment plan (DRIP). This helps boost the return on the reinvested funds. In addition, during times of market pullbacks, dividends can buy a larger number of shares, which can make it easier for investors to ride out a downturn.

The strategy requires patience, but it can pay off in a big way over the long haul.

Fortis

Fortis (TSX:FTS) trades near $55.75 per share at the time of writing. That’s up from the 12-month low of around $50, but still down from the $64 the stock fetched about two years ago.

Fortis is a utility company with about $65 billion in assets spread out across Canada, the United States, and the Caribbean. The businesses are primarily rate-regulated operations that include power generation facilities, electric transmission networks, and natural gas distribution utilities. Revenue and cash flow tends to be reliable and predictable. This enables management to plan out capital investments over several years to drive growth.

Fortis is currently working on a $25 billion capital program that will boost the rate base from $37 billion in 2023 to $49.4 billion in 2028. The resulting increase in cash flow should support the planned annual dividend hikes of 4-6% over that timeframe. Fortis raised the payout in each of the past 50 years and offers a 2% DRIP discount. The stock currently provides a 4.25% dividend yield.

Long-term shareholders have done well with Fortis stock. A $10,000 investment in Fortis 25 years ago would be worth about $160,000 today with the dividends reinvested.

Enbridge

Enbridge (TSX:ENB) is a giant in the North American energy infrastructure industry with a current market capitalization near $107 billion. The company’s oil pipelines move 30% of the oil produced in Canada and the United States. The natural gas transmission network transports about a fifth of the natural gas used by American homes and businesses.

Enbridge’s growth initiatives in the past few years have focused on exports, renewable energy, and natural gas utilities. The company owns an oil export terminal and is a partner in the Woodfibre liquified natural gas (LNG) export facility being built in British Columbia. In addition, Enbridge is in the process of finalizing its US$14 billion acquisition of three natural gas utilities in the United States.

Demand for North American oil and natural gas is expected to grow in the coming years as countries around the globe seek out reliable supplies. In the domestic markets, a wave of data centre construction is projected to boost demand for electricity. Analysts expect gas-fired power generation to deliver a good chunk of the required power supply.

Enbridge trades near $50 per share at the time of writing compared to $59 at the peak in 2022. Investors can get a 7.3% yield on the stock right now. The board raised the payout by 3.1% for 2024 and Enbridge investors have received a dividend increase in each of the past 29 years.

A $10,000 investment in ENB stock 25 years ago would be worth about $175,000 today with the dividends reinvested.

The bottom line on top TSX stocks for TFSA total returns

There is no guarantee that these companies will deliver the same returns over the next quarter century, but the strategy of buying top TSX dividend-growth stocks and using the distributions to buy new shares is a proven one for building retirement portfolios over the long term. Several top Canadian dividend stocks now trade at discounted prices.

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.

The Motley Fool recommends Enbridge and Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Enbridge.

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