The TFSA (Tax-Free Savings Account) is a quintessential tax savings tool for Canadian investors. When you invest in the TFSA, all your income (capital gains, interest, and/or dividends) is safe from tax. The more income you keep, the more you can re-invest and compound over years and decades.
Source: Getty Images
Look for BIG winners to hold in your TFSA
The TFSA is the ideal place to hold stocks that you believe will have a very long runway of earnings/cash flow per share growth. Some financial advisors suggest using the TFSA as a high interest account or for dividend stocks. However, that somewhat misses the point of the TFSA.
If you aren’t going to pay any tax, you probably want to get the best returns that you can possibly get. You don’t want to pay any tax on a capital gain that rises by 10, 50, or 100 times your initial capital.
If you are wondering what Canadian stocks could provide multiplying returns for a TFSA, here are two worth looking at today.
A financial stock for the long haul
goeasy (TSX: GSY) has been an exceptional compounder for shareholders in the past decade. Its stock has earned shareholders a 1,178% total return in that time. With a market cap of only $2.9 billion, it could still rise significantly more.
goeasy provides loans to consumers that the big banks generally decline. While they are riskier customers, goeasy charges elevated interest rates to compensate for the risk. It also has a very prudent underwriting formula that has helped it to steadily keep charge-offs low.
This company still has plenty of levers for growth. It has room to grow current business segments in home equity lines of credit, car and vehicle loans, and point-of-sale loans.
Likewise, it has plans to introduce a rewards credit card with a special focus on new Canadians and sub-prime consumers. Despite its growth opportunities, this TFSA stock is attractively priced with a price-to-earnings ratio below nine and a dividend yield of 2.6%!
A software stock for a long-term TFSA hold
Topicus.com (TSXV: TOI) is another TFSA stock that could deliver strong compounding returns. It was a spin-off of Constellation Software a couple years ago.
Some investors have speculated that Topicus could mimic Constellation Software’s return profile over the past 10 years. Given Constellation is up 1,171% (or a 28% compounded annual growth rate) in that time, expectations are certainly high for Topicus.
While Topicus may not hit that return rate, even half that rate of return would be highly acceptable. A stock that compounds by 14% would double in a little over five years.
Topicus has a healthy balance sheet, a great acquisition program, and a strong software development platform. It is set for a good run in a TFSA if you are patient.
The Foolish bottom line
The TFSA is the ideal place to hold stocks that can rapidly multiply your capital. Look for profitable companies that are steadily growing and able to reinvest profits into more growth.
Over time, owning these types of stocks can generate substantial wealth. You don’t want to pay any tax on that wealth, so hold them in your TFSA.
