Growing a modest initial investment into a substantial nest egg might at first glance seem like a distant goal. However, with the implementation of strategic investment choices and the considerable benefits offered by a Tax-Free Savings Account (TFSA), this aspiration becomes significantly more achievable. Let’s look at a potential scenario exploring how an initial investment of $15,000 in Capital Power (TSX: CPX) could potentially grow into a substantial sum of $215,000 over a period of time, leveraging the power of compounding within a tax-sheltered environment.
Why Capital Power
Capital Power is a prominent North American power producer. The power producer is actively involved in the development, acquisition, operation, and optimization of power generation facilities that utilize a diverse range of energy sources. The company boasts a significant market capitalization of approximately $6.1 billion at writing, reflecting its substantial presence and influence within the energy sector.
One of the most compelling and standout features of Capital Power as an investment is its consistent and reliable history of dividend payments to its shareholders. The company currently offers a forward annual dividend rate of $2.46 per share, translating to a yield of approximately 5.9%. This dividend yield is notably higher than the company’s five-year average dividend yield of 5.6%, indicating a strong and ongoing commitment to returning value directly to its shareholders through regular income distributions. Furthermore, the company’s current dividend payout ratio stands at a comfortable 53.5%, thus suggesting that the dividends being paid out are well-supported and covered by the company’s earnings. This is a positive and reassuring sign for investors who are seeking a reliable and sustainable source of income from their investments.
In its most recent financial results, Capital Power reported quarterly revenue of $4 billion, accompanied by a healthy profit margin of 13.7%. The company’s operating margin was also strong at 34.2%, and its return on equity demonstrated an impressive figure of 18%. These robust financial figures collectively underscore the company’s underlying profitability and its operational efficiency – thus making it an inherently attractive option for investors who are focused on long-term growth and value creation.
Making that income
Now, let’s explore the potential for growth of an initial $15,000 investment in Capital Power within the tax-advantaged confines of a TFSA. The TFSA offers the remarkable benefit of allowing your investments to grow on a completely tax-free basis, meaning that all dividends received and any capital gains realized are not subject to any form of taxation. This significant feature can substantially enhance the compounding effect of your returns over extended periods.
Assuming a compound annual growth rate (CAGR) of 12% on the investment, plus 6.3% for the dividend, as it’s achieved in the past five years, the initial investment could potentially grow quite substantially over time.
| Year | Share Price | Shares Owned | Annual Dividend Per Share | Annual Dividend | Year End Stock Price | New Shares Purchased | New Balance |
| 1 | $44.00 | 341 | $2.61 | $890.01 | $49.28 | 18 | $17,691.52 |
| 2 | $49.28 | 359 | $2.77 | $996.02 | $55.19 | 18 | $20,807.99 |
| 3 | $55.19 | 377 | $2.95 | $1,111.86 | $61.82 | 18 | $24,417.65 |
| 4 | $61.82 | 395 | $3.14 | $1,238.33 | $69.23 | 18 | $28,593.99 |
| 5 | $69.23 | 413 | $3.33 | $1,376.33 | $77.54 | 18 | $33,421.05 |
| 6 | $77.54 | 431 | $3.54 | $1,526.81 | $86.85 | 18 | $38,994.84 |
| 7 | $86.85 | 449 | $3.77 | $1,690.78 | $97.27 | 17 | $45,327.81 |
| 8 | $97.27 | 466 | $4.00 | $1,865.35 | $108.94 | 17 | $52,619.17 |
| 9 | $108.94 | 483 | $4.26 | $2,055.20 | $122.02 | 17 | $61,007.73 |
| 10 | $122.02 | 500 | $4.52 | $2,261.57 | $136.66 | 17 | $70,651.84 |
| 11 | $136.66 | 517 | $4.81 | $2,485.79 | $153.06 | 16 | $81,578.95 |
| 12 | $153.06 | 533 | $5.11 | $2,724.17 | $171.42 | 16 | $94,111.20 |
| 13 | $171.42 | 549 | $5.43 | $2,982.72 | $191.99 | 16 | $108,476.44 |
| 14 | $191.99 | 565 | $5.78 | $3,263.03 | $215.03 | 15 | $124,719.11 |
| 15 | $215.03 | 580 | $6.14 | $3,560.69 | $240.84 | 15 | $143,297.95 |
| 16 | $240.84 | 595 | $6.53 | $3,882.90 | $269.74 | 14 | $164,270.03 |
| 17 | $269.74 | 609 | $6.94 | $4,224.64 | $302.11 | 14 | $188,211.91 |
| 18 | $302.11 | 623 | $7.37 | $4,594.03 | $338.36 | 14 | $215,534.36 |
Bottom line
Turning an initial investment of $15,000 Canadian into a substantial $215,000 Canadian nest egg is undoubtedly appealing. Yet it is essential to also carefully consider the inherent risks associated with any investment. The energy sector, in particular, can be subject to volatility influenced by various factors. Implementing a strategy of diversifying your investment portfolio across different sectors and asset classes can help to mitigate these potential risks, thereby ensuring that your overall investment strategy remains robust and resilient across a range of different market conditions.
