Those who designed the Tax-Free Savings Account (TFSA) did so with the intention of encouraging Canadians to improve their savings practices. By incentivizing them with tax-free earnings on assets in the account, retirees had the perfect plan. Few could have predicted that the account would turn into an investment vehicle for savvier investors.
Remember, as long as you remain within the contribution limits, any earnings on assets held in the account are tax-free. Yes, any interest income on cash is a big plus, but there’s more. Allocating part of the contribution room to hold high-quality TSX stocks means any capital gains and dividend income can grow your wealth without incurring taxes.
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Get better use out of your TFSA
I’ve got nothing against holding money in the account. People have their preferences. However, using the TFSA only for cash means you’re missing the bigger picture. Interest income isn’t as great as the returns top-notch stocks can offer you in a TFSA, and you won’t be able to use the power of compounding to accelerate your wealth growth.
While you can allocate the contribution room to other types of assets, I prefer using it for stocks. Why? Because stocks and dividend stocks, in particular, can deliver far more growth than other asset classes you can hold in a TFSA. You can also reinvest the dividends you earn to buy more shares and compound the growth.
You get these returns while you wait for capital gains to grow the value of your investments over time. Besides all of this, you have the luxury of diversifying into different sectors of the economy to reduce capital risk.
Here are a couple of TSX stocks you can consider adding to your self-directed TFSA portfolio to kick things off on the right note.
A consumer staple stock with solid demand
Sugar is a consumer staple that will always be in high demand, and companies like Rogers Sugar Inc. (TSX:RSI) will always get good money for it. RSI is a $723.6 million market-cap sugar producer that refines, packages, and markets sugar products. Its markets include Canada, the key revenue generator, alongside the US, Europe, and several other international markets.
The company has been doing well, as the chart above shows. Its solid fundamentals are reflected in the chart. The first half of the year saw the company’s net earnings increase by 30.8% year-over-year. Its revenues increased by 10.1% in the same period, and its free cash flow climbed by almost 47%. The steady demand for sweeteners and other sugar products is the major contributor to such fantastic results.
A utility company with stable revenue
Like how sugar is a consumer staple, utility services are just as essential to consumers, if not more. Emera Inc. (TSX:EMA) is an $18.3 billion market-cap energy and services company. Emera invests in electricity generation, transmission, and distribution. It also has gas transmission and utility energy services. The company operates across North America and the Caribbean, both of which are highly rate-regulated markets.
As of this writing, EMA stock is up 14.8% year-to-date, whereas the rest of the Canadian stock market is up 6.6% in the same period. The reason it’s outperforming the market is its stellar financial performance. The company’s management has also said that its $20 billion capital program will continue making the company better and better. Investors can expect a lot from this defensive stock in the years to come.
Foolish takeaway
The only problem with TFSA investing is that there’s an annual contribution limit. On that note, you should know that if you have been eligible for a TFSA for a while and haven’t contributed to it, the annual contribution room from those years is still available.
Suppose you have been eligible for it since 2009. In that case, you should know there’s a cumulative $102,000 contribution room available. Rogers Sugar stock and Emera stock can be excellent foundations for your TFSA portfolio.
