A Bank of Montreal survey showed fewer Canadians used the Tax-Free Savings Account (TFSA) in 2023. Poll respondents said the high cost of living affected their finances and prevented them from saving and investing. However, the trend should change as interest rates fall, inflation drops, and economic conditions improve.
The TFSA remains a powerful tool if you were to meet your financial goal or even build wealth. You can make the most of its tax-free money growth feature by making regular contributions; the maximum annual limit, the better.
Eligible investments include bonds, guaranteed investment certificates (GICs), mutual funds, and exchange-traded funds (ETFs), although most users prefer to hold dividend stocks. The power of compounding comes into play when you reinvest dividends and accumulate more shares. A small investment can turn into a fortune over time.
Money growth
The TSX houses quality stocks from various sectors. One of the top dividend-payers is Freehold Royalties (TSX:FRU) in the energy sector. Besides the fantastic 7.7% dividend yield (4.4% industry average), the payout frequency is monthly, not quarterly. Your TFSA balance grows faster if you reinvest dividends 12 times a year instead of four.
FRU trades at $13.98 per share (+8.2% year-to-date). Given the price, dividend yield, and monthly payouts, a ‘one-time’ $10,000 investment will compound to $90,143.40 in 28.5 years. The example illustrates the overall money growth if the compound frequency is monthly. Yearly TFSA contributions would shorten the timeframe.
Quality earnings
Freehold Royalties isn’t an oil and gas producer but caters to around 360 operators in North America’s oil and gas industry. The $2.1 billion royalty corporation acquires and manages royalty interests in crude oil, natural gas, natural gas liquids, and potash properties. Its portfolio in Canada is 6.2 million acres, and a sizeable 1.1 million gross grilling acres in the United States.
According to management, mineral titles and royalties are simple asset classes but give Freehold a distinct competitive advantage. It’s a high-margin business model because of zero capital cost requirements. Operators, not the royalty owner, spend on capital, operating, and abandonment costs. The same setup is why dividend payments have been sustainable and consistent in the last 28 years.
The top 30 payors are premium Canadian (19) and American (11) industry operators, including Canadian Natural Resources, Whitecap Resources, and Exxon Mobil. Also, the continuous development in its existing land position in the U.S. by operators requires no incremental capital, a free upside for Freehold.
In the first half of 2024, royalty and other revenue increased 6% year-over-year to $158.7 million, while net income climbed 33% to $73.3 million. Around 84% of Freehold’s revenue during the period came from the crude oil segment. Management expects strong oil prices to drive activity in the royalty lands throughout the rest of 2024.
Lifetime money growth
The TFSA is a one-of-kind investment vehicle with annual contribution limits. By contributing the maximum each year and holding a reliable dividend-payer like Freehold Royalties, money growth could be for life.
