The TFSA (Tax-Free Savings Account) is perfect for long-term investments. When you pay no tax on gains or income, you better make sure those gains and income grow massively. By paying no tax, you can maximize the wealth-creation process.
Source: Getty Images
Maximize your TFSA by owning stocks that constantly compound
The power of compounding can only happen if you pick stocks in great businesses and give them plenty of time to grow. The best stocks are those that can reinvest a large amount of their earnings over and over. The challenge right now is that the economy and the stock market are incredibly volatile.
Build a TFSA portfolio by averaging into a position
The best thing you can do is draw up a list of high-quality stocks you hope to own. When the market sells off on the next tariff or Trump worries, buy a third of a position.
Wait a few months, if things start to stabilize, you can either add more or just wait. We are only a couple of months into this presidency, so there are sure to be more dips and dives.
Over the year, you can gradually average into a full position. Hopefully, the year will give you opportunities to build a strong portfolio with a generally low-cost base.
If you are wondering what kind of high-quality stocks would be ideal for adding to a long-term, buy-and-hold TFSA portfolio, here are two to look at adding throughout the year.
Visa: A U.S. stock but a great value creator
Visa (NYSE: V) is one of the great compounding stocks in the world. It’s an ideal TFSA stock. It hosts the infrastructure rails for commerce across the world. This network is irreplaceable. Visa is likely to be around and highly relevant far beyond most people’s lifetimes.
The company is incredibly profitable. It has 50% profit margins, which is just outstanding. For a decade, it has compounded revenues and earnings per share by a respective 10% and 15% rates.
This TFSA stock is rarely cheap or a bargain. However, worries about the economy could pull this stock down. It could be a great time to add to this growing quality company.
Keep in mind that dividends from U.S. stocks are liable for withholding tax, even in a TFSA. Capital gains are safe, and that is the main part of the return you are looking for with Visa. However, it is something to keep in mind when owning U.S. stocks in a TFSA.
Constellation Software: No better Canadian compounder than this
If you are only interested in owning Canadian stocks in your TFSA, Constellation Software (TSX: CSU) is an anchor in any portfolio. If you haven’t noticed, its stock price has only risen in the face of the Trump tariff crisis.
Investors are running to Constellation as a safe-haven stock for several reasons. First, it is one of the best-performing stocks in Canadian history. It has compounded returns by 25% annually over the past 10 years and by 35% over the past 18 years.
Second, with nearly 1,000 operating companies under its fold, Constellation is diversified by sector, industry, and geography. It operates niche software businesses that tend to be economically essential to its customers. It is a resilient stock in any economy.
Third, its companies are domiciled around the world. Consequently, tariff threats, even against software, should not overly affect its business.
Like Visa, it is not the cheapest stock after its recent rise. However, if it takes any type of dip in the market, it would be the perfect addition to any TFSA.
