The 1 Dividend Growth Stock I’d Never Sell in My TFSA

Use your TFSA’s tax-free compounding: XDIV is a low-cost, diversified ETF built for steady dividend growth and buy-and-hold investors.

Key Points
  • Choose dividend stocks with payout ratios under about 70% to keep payments safe during downturns.
  • TFSA’s tax-free reinvestment supercharges compounding, turning modest yields into meaningful long-term income.
  • XDIV offers monthly distributions, low fees (0.11%), and diversified Canadian dividend exposure ideal for core TFSA holdings.

When you’re looking for a dividend growth stock for your Tax-Free Savings Account (TFSA), investors want a business that can steadily raise that income year after year without raising their risk profile. The goal is to blend reliable payouts, consistent growth, and tax-free compounding. So today, let’s look at what investors should focus on, and one dividend growth stock you’ll never have to sell.

ETF is short for exchange traded fund, a popular investment choice for Canadians

Source: Getty Images

Considerations

Start with dividend safety. A strong yield means nothing if it isn’t sustainable. You want a company with a payout ratio that sits comfortably below 70%. That leaves room to reinvest in growth and keep increasing the dividend even during tougher years. Then comes earnings growth. Dividend hikes can’t happen without growing profits. The best dividend growth stocks have a business model that consistently expands cash flow, not one that depends on short-term commodity spikes or temporary booms.

You’ll also want to check balance-sheet strength. A company overloaded with debt is vulnerable when interest rates rise, making future dividend growth harder. This also relies on industry stability. Some sectors are built for dependable growth while others can be volatile. Investors want dividend growth stocks that serve essential needs, have pricing power, and can pass costs to customers. These kinds of businesses can grow dividends in any environment, which is ideal for long-term compounding.

Finally, remember that the TFSA’s tax-free nature supercharges compounding. Every dividend payment and reinvested share grows without tax drag, which can turn modest yields into major long-term returns. A 4% dividend growing at 6% a year inside a TFSA doubles your income roughly every 12 years, and you keep every cent.

Consider XDIV

It can be overwhelming with so many dividend stocks out there, which is why an exchange traded fund (ETF) like iShares Core MSCI Canadian Quality Dividend Index ETF (TSX: XDIV) looks like a very strong candidate. Especially for a “buy-and-hold forever” vehicle inside a Canadian TFSA.

XDIV targets Canadian stocks that have higher-than-average dividend yields plus solid metrics. These include stable earnings, healthy balance sheets, and reasonable debt levels. The management expense ratio is also quite low at just 0.11%, with monthly distributions as well. That steady drip of cash can be reinvested tax-free in a TFSA and help the snowball effect of compounding.

Though it has only been around since 2017, XDIV has delivered respectable returns. At writing, it offers a one-year return of 13% and year-to-date return of 19%! While past performance is no guarantee, it does show the strategy has rewarded investors so far.

The big benefit here is that because it’s diversified across many firms, one company underperforming won’t sink the whole holding. The strategy aligns with a TFSA’s purpose of tax-free growth and income. Distributions inside a TFSA are sheltered from Canadian tax, which makes each dollar reinvested more powerful. Add in monthly income and low fees, and it’s a long-term hold investors can latch right on to.

Bottom line

If I were to pick a single vehicle inside a TFSA today aiming for long-term dividend growth, I’d rate XDIV highly. It ticks many of the right boxes of diversified Canadian dividend exposure, quality screening, low fees, monthly income, and a strategy built for long-term holding rather than quick speculation. While I wouldn’t say it guarantees you’ll never sell as circumstances change, it certainly qualifies as a core holding you could buy, hold inside your TFSA, reinvest dividends, and let time work its compounding magic.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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