Can you really transform your retirement starting with just $7,000?
It might not seem likely, but if you still have a decade or so to go until you retire, it can be done. $7,000 can grow a surprising amount in 10 years. If you invest $7,000 at a 10% rate of return over a decade, it turns into $18,156. In a TFSA, neither your dividends nor your capital gains are taxed, so you can keep the $18,156 you earn. And you can increase your ending amount by contributing more to your TFSA every time you get paid.
Over the span of a decade of compounding and dollar cost averaging, you could end up with $100,000, $200,000 or more in your TFSA. Such sums could transform your retirement and make the difference between you having to work part-time into your 60s and being able to retire with a capital “R.” In this article, I will explore the $7,000 TFSA strategy that could transform your retirement.
Dollar cost averaging into defensive stocks
The way to use a TFSA to transform your retirement is to dollar cost average into defensive stocks. What this entails is finding a collection of defensive stocks and exchange-traded funds (ETFs) and adding to your positions a little every time you get paid. The benefits of this strategy are twofold:
- Investing every time you get paid lets you average out low and high stock prices, giving you an “average” return for the stock over your holding period.
- Holding defensive stocks spares you the risks inherent in the market’s riskiest companies.
Overall, dollar cost averaging into defensive stocks is an effective way to transform your retirement, starting with just $7,000. With that established, let’s take a look at some quality defensive stocks you could consider investing in.
What are defensive stocks
Defensive stocks are shares in established, often dividend-paying companies. Most of these stocks are in defensive sectors like utilities and real estate that are not at risk of being “disrupted” by new technologies. Let’s take a look at a few of these.
One defensive stock you could consider dollar cost averaging into is Fortis (TSX:FTS). Fortis is a Canadian utility company that has a stellar track record. It has raised its dividend 51 years in a row. It has grown its earnings while earning high margins. Finally, it has a comparatively low amount of debt by utility standards, with a 1.2 debt-to-common equity ratio. Trading at 20 times earnings, it’s not exactly “dirt” cheap. It’s cheaper than average for the North American markets, though, and it has a fairly high dividend yield.
Another defensive stock you could consider is Toronto-Dominion Bank (TSX:TD). It’s pretty cheap, trading at 12 times earnings, and it has a 4.5% dividend yield. It grew its revenue by 10% last quarter and has a better growth track record than most TSX banks. It’s under an asset cap in the U.S., so its U.S. growth is challenged for the moment. But it is nevertheless an attractive income play.
Transform your retirement the Foolish way
The best way to transform your retirement is to dollar cost average into defensive stocks like Fortis and Toronto-Dominion Bank. By doing this, you can build a passive-income stream starting with as little as $7,000. It will take time, but the result will be more than worth it.
