TFSA: 2 Canadian Stocks to Buy and Hold for Tax-Free Gains

Investing in a TFSA can unlock significant wealth-building potential, especially when you select high-quality stocks.

Kay Ng

Author Bio Kay graduated from the University of British Columbia with a Bachelor of Science in Computer Science and furthered her studies in financial markets, finance, and financial accounting. She began investing in dividend stocks in 2008, turning an early interest into a lasting passion. Over the years, Kay has refined her investment approach to focus on high-quality businesses, using fundamental analysis and valuation to identify long-term investment opportunities. Her investment research and articles have been featured in The Motley Fool, Sure Dividend, and Seeking Alpha. Outside of investing, Kay enjoys playing the piano, from popular songs learned by ear to challenging classical compositions. Her favourites include Fantaisie-Impromptu by Frédéric Chopin and La Campanella by Franz Liszt. Education Bachelor of Science (BSc) in Computer Science, University of British Columbia Further studies in financial markets, finance, and financial accounting Areas of Expertise Dividend stocks, fundamental analysis, company valuation, quality investing, long-term investing, business fundamentals, and identifying investment opportunities in high-quality companies. Social Media Profiles LinkedIn Favorite Investment Quotes “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” — Benjamin Graham “A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” — Warren Buffett

Published October 1, 2024 4:10 pm EDT

The Tax-Free Savings Account (TFSA) is one of Canada’s most powerful financial tools, allowing Canadians to save and invest without the burden of taxes on income and capital gains. This means that every dollar you earn can be reinvested, compounding your wealth over time.

For long-term investors, leveraging the TFSA can lead to substantial growth, especially when you choose the right stocks. Here, we highlight two Canadian stocks that are set up for tax-free gains: Dollarama (TSX: DOL) and Bank of Montreal (TSX: BMO).

Canada national flag waving in wind on clear day — Source: Getty Images

Dollarama: A resilient growth champion

Dollarama is often perceived as an expensive stock, yet it continues to defy gravity with its upward trajectory. At the end of 2022, the stock had a price-to-earnings (P/E) ratio hovering around 30, but since then, it has soared approximately 70%. This remarkable growth can be attributed to the company’s impressive profitability and expansion strategies.

Over the past decade, Dollarama has consistently increased its sales per share at a compound annual growth rate (CAGR) of nearly 16%, while its diluted earnings per share have skyrocketed at a CAGR of 20%. This amazing growth has been fueled by an expansion in margins, reflecting a well-managed business model focused on enhancing profitability. While the dividend-growth rate of around 12% annually is notable, the disparity between revenue and dividend growth indicates that Dollarama is primarily concentrated on reinvesting profits for further expansion.

The company has been aggressively opening new locations, adding about 53 net stores each year over the last five years. This expansion enables Dollarama to reach a broader customer base, catering to both urban and rural shoppers. The store’s strategic focus on providing a diverse array of products — from everyday essentials to seasonal items — encourages repeat visits and fosters customer loyalty.

At its current price of $136.85 per share, Dollarama trades at about 35 times earnings. Analysts generally consider this valuation reasonable, though cautious investors might wait for a market correction to acquire more shares. In a TFSA, Dollarama stands out as a compelling option for investors seeking long-term capital appreciation.

Bank of Montreal: A reliable income generator

For those who prefer a more income-focused investment, the Bank of Montreal presents an attractive opportunity. Unlike some of its peers, BMO has not fully participated in the recent market rally and has, in fact, experienced a slight downward trend since early 2022. However, this could offer savvy investors an excellent entry point.

Currently trading at $122.19 per share, BMO’s P/E is reasonable at 11.7. More importantly, the bank offers a robust dividend yield of approximately 5.1%, which is about 74% higher than the yield of the Canadian stock market. This makes BMO a particularly enticing option for income-seeking investors.

While the financial services sector can be sensitive to economic ups and downs, BMO boasts an impressive track record of dividend payments, with no cuts in the last 50 years. Its trailing 12-month payout ratio is around 53%, indicating that the bank can comfortably sustain its dividends even during challenging economic times. For investors looking to build a reliable income stream within a TFSA, the big Canadian bank stock is a solid choice.

The Foolish investor takeaway

Investing in a TFSA can unlock significant wealth-building potential, especially when you select high-quality stocks like Dollarama and Bank of Montreal. With Dollarama’s impressive growth and BMO’s reliable income, both stocks provide unique advantages for long-term investors.