The Tax-Free Savings Account (TFSA) is a great way to build wealth tax-efficiently, as it allows you to withdraw money tax-free. Yet, average Canadians in the 30-34 age group had $59,110 of unused TFSA contribution room, as per Statistics Canada’s 2022 TFSA contribution data. Don’t let your TFSA contribution go unused, as the time spent in the market is more rewarding than the time spent procrastinating.
If you are worried about downside risks, there are some resilient growth stocks and exchange-traded funds (ETFs) that can give you growth in the next five years. You can build a core portfolio, where you allocate 85% of your investment, and a satellite portfolio where you allocate 15% of your investment.
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How to invest $42,500 in TFSA core portfolio
The core TFSA portfolio could comprise stocks like Constellation Software (TSX: CSU), goeasy (TSX: GSY), and Hive Digital Solutions (TSXV:HIVE). Such stocks can give double-digit growth in five years and help you build wealth in the long term.
Constellation Software
Constellation Software leverages the rule of compounding and operates like a private equity firm but for vertical-specific software companies. It continues to acquire mission-critical software companies with sticky applications that ensure a steady cash flow, and uses that cash flow to purchase additional companies. Constellation does not give much dividend as it reinvests all its cash flow, but it gives capital appreciation as every new acquisition increases the company’s enterprise value.
Over the years, it has built a vast constellation of software companies across various geographies, applications, and verticals. Constellation never enters a bidding war to avoid paying a premium price for an acquisition. It aims to buy a company at a reasonable price, let the company operate as usual, and only provide support where needed.
This model of acquisition has ample growth potential as 5G and artificial intelligence (AI) have renewed the investment in technology spending across most verticals where Constellation has presence. New software companies will spring up, which Constellation can consider acquiring to increase its enterprise value.
You can expect the stock to grow at a compounded annual growth rate of 20% and double your money in five years.
goeasy stock
If you are looking for some liquidity in your TFSA where you can withdraw without selling shares, consider a dividend-growth stock like goeasy. The non-prime lender can diversify your money in another sector and pay quarterly dividends. The stock has a dividend yield of 3.32%, meaning one share of $176 will pay $5.84 in annual dividends. While this amount may look small, the lender has been growing the dividend at a compound annual growth rate of 30% for the last 11 years.
The lender is growing its loan portfolio by giving different types of loans through various distribution channels and in new provinces, while keeping credit risk in check. The value of the loan portfolio determines the share price, and a small portion of the interest earned on this bigger portfolio is distributed as dividends.
If you’d invested in goeasy in 2020, you would have earned $1.8 in annual dividends on a $53 share. Had you held that share till now, you would get $5.84 per share, which equates to 11% of the 2020 share price. That is the power of holding a dividend-growth stock.
How to invest $7,500 in a TFSA satellite portfolio
Once your core portfolio is in place, you can invest a small portion in riskier stocks with a significant upside potential.
Bitcoin mining firm Hive Digital Solutions is expanding its capacity several-fold from six Exahash per second (EH/s) to 25 EH/s. The new capacity could grow its revenue fourfold. But the main driver of profits will be its AI/high-performance computing (HPC) infrastructure, which tripled in revenue in 2024.
While all other AI stocks have surged to new highs, Hive is picking up momentum. It is trading near $3.4 but has the potential to cross $6 in less than a year. The stock is highly volatile because its share price is influenced by the price of Bitcoin in its inventory. However, low debt and stable earnings from HPC reduce the downside risk, and fast-growing revenue from HPC could drive future growth, making its stock a potential buy on dips.
