The Tax-Free Saving Account (TFSA) is the ideal account to first use when investing. Firstly, all income (capital gains, dividends, and interest) earned in the account is safe from tax. Secondly, all withdrawals from the account are likewise tax-free.
Compound your capital by paying no tax in a TFSA
Certainly, there are a few rules when it comes to contributions and how you use the account. Fortunately, the TFSA is largely a no-strings-attached way to invest in stocks tax-free!
I like to use my TFSA for my long-term investment holdings. I don’t want to be liable for any tax on any of my stocks that could multiply wealth over years and decades.
If you believe a similar approach could work for you, here are three top stocks for long-term, tax-free wealth generation inside your TFSA.
A trucking company with a great growth record
As a North American-wide trucking and transportation business, TFI International (TSX: TFII) may not have the glamour of other fancy growth stocks. However, it has delivered spectacular returns over the years. Its stock is up 357% in the past five years.
TFI has built out a transport empire by acquiring smaller transport providers and incorporating its low-cost operating model to elevate returns. While 2024 has been a bumpy year for the freight sector, TFI continues to generate strong free cash flows and make smart investments.
TFI has ample room to improve operating performance from here. With a highly invested chief executive officer and a great network, investors should continue to see great returns five to 10 years out.
One of the best compounders in Canada
Another TFSA stock to add is Constellation Software (TSX: CSU). Its stock is up 225% in the past five years. While Constellation now has a market cap of $91 billion, the company still has a large runway to keep growing.
Constellation acquires vertical market software (VMS) businesses around the world. These are normally small. As a result, it can often buy them at attractive valuations.
It then implements operational and financial best practices, optimizes them to generate free cash flow, and takes the proceeds to invest in more VMS companies.
It has thousands of companies in its acquisition universe. To mitigate the law of large numbers, Constellation has started to spin off specialized entities out of its fold. It is very likely to continue to find creative ways to reward long-term, patient shareholders.
An insurer for your TFSA
Trisura Group (TSX: TSU) is an up-and-coming long-term compounder to hold in a TFSA. It provides specialty insurance and reinsurance fronting across North America. It has a low-cost operating model. Along with a specialization in niche segments, it is able to earn market-leading returns on equity.
Trisura has a large growth opportunity in the United States. Despite being up 476% in the past five years, the stock has flatlined for a couple of years. It had one major program write-down in 2023 that temporarily affected results.
However, it looks to have rightsized its underwriting and partnership practices. It is on the precipice of another leg of growth ahead.
It happens to trade at a material discount to other specialized peers. If it can continue to execute, TFSA investors could benefit from a rising share valuation alongside a rise in earnings.
