Canadian investors can use the Tax-Free Savings Account (TFSA) as a tool to build passive income and grow their capital. You don’t pay any tax on the income (capital gains, interest, and dividends) you earn in the TFSA. Consequently, all income you earn can be re-invested while compounding into more capital-growing opportunities.
The best kind of stocks for TFSA passive income are those which might have moderate dividend yields, but large dividend growth. The reason they can grow their dividends so quickly is because their earnings are also growing quickly.
You get the best of both worlds: capital appreciation and growing dividends. These are the types of stocks you want to buy and never sell. For income and growth, here are three top stocks to hold in a TFSA.
An ultra-growth stock for a TFSA
Propel Holdings (TSX:PRL) is one of the fastest-growing stocks in Canada. It could be an ideal long-term TFSA hold.
It has grown revenues by a 40% compounded annual growth rate (CAGR) over the past five years. Earnings per share have risen by a 137% CAGR in that time!
Since 2021, when Propel listed on the TSX, it has grown its dividend by 47%. PRL has raised its dividend per share every quarter in 2024.
Propel provides small loans to non-prime consumers. This is a riskier segment. However, it uses a proprietary A.I. lending platform to underwrite loans quickly and effectively. It also charges elevated interest rates to compensate for its higher-risk customers.
Propel has no branches. It only operates online or through partners. As a result, it is able to earn above-average margins and returns on equity. It is also able to quickly scale because it needs very little capital outlay to grow.
Propel continues to target 30%+ revenue growth and strong margin improvements in the years ahead. A recent acquisition in the U.K. could certainly bolster this growth plan. It yields 1.7% today.
A financial with tremendous dividend growth
EQB Inc. (TSX:EQB) is another financial stock that could make for a great long-term TFSA play. It may not be growing as quickly as Propel, but it has delivered solid returns for shareholders. Its stock is up 97% over the past five years.
EQB operates through EQ Bank. It is Canada’s seventh-largest bank with $125 billion of assets under management. It operates solely through an online platform. In doing so, the bank can keep costs low and earn an above-average 16%-plus return on equity.
EQB only yields 1.8%. However, it has grown its dividend by a 20% CAGR since 2016. For context, its current dividend is more than three times the size it was in 2016.
A small yield but elevated growth for a TFSA
TFI International (TSX:TFII) is another great stock for income and growth in a TFSA. TFI is one of the largest freight and transport businesses in Canada. Recent acquisitions in the past few years position TFI as a growing player in the U.S. as well.
With 134 acquisitions completed since 2008, this company’s strategy of low-cost operations and smart acquisitions has paid off. Its stock is up 624% in the past 10 years!
Currently, the North American freight market is depressed. That is impacting TFI’s earnings. However, it has plenty of levers to pull for maximizing profitability and operating efficiency. Likewise, it still generates substantial cash flows. It can use that to acquire more companies, buyback stock, or increase its dividend.
TFI stock earns a 0.8% dividend yield. It has grown its dividend by a 14% CAGR over the past 10 years. For growth and a bit of income, TFI is a nice bet for a lifetime hold in a TFSA.
