There’s no question that one of the best and most powerful tools Canadian investors have at their disposal is the Tax-Free Savings Account (TFSA).
The TFSA gives Canadians the ability to invest in thousands of stocks across all sectors and industries, and all your gains and dividends are completely tax-free. That’s incredibly important because taxes are one of the biggest obstacles investors face and one of the biggest limiters to how quickly you can compound your capital.
In addition to allowing you to invest and earn income tax-free, the TFSA is also especially powerful because of the contribution room it offers. Right now, Canadian investors receive $7,000 in contribution room each year, a significant amount of money to put to work for the long haul.
However, as powerful as the TFSA is, many Canadians still don’t use it to its full potential. The biggest mistake investors make is either treating it like a simple savings account or taking unnecessary risks with speculative penny stocks that can easily wipe out their contribution room.
That’s why the best way to take advantage of your TFSA is to invest in high-quality businesses that can steadily grow your capital for years. That way, you’re not just protecting your hard-earned money; you’re compounding it tax-free.
So, if you have $7,000 to invest this year, here’s a simple approach to building a reliable long-term portfolio of high-quality stocks.
Source: Getty Images
Investors should first focus on core Canadian stocks for their TFSA
When it comes to building a portfolio of high-quality stocks in your TFSA, starting with reliable, defensive large caps that can serve as the core pillars of your portfolio is one of the best approaches.
These companies are steady and dependable, helping protect your money during market downturns while still growing consistently over time. They usually offer attractive dividends too, quietly compounding in the background and powering your portfolio forward year after year.
They might not be the most exciting investments or deliver the biggest gains, but they’re the stable foundation that helps protect and balance your portfolio for decades.
For example, a top utility stock like Fortis (TSX:FTS), or a well-known dividend stock like Enbridge (TSX:ENB) – the $146 billion energy infrastructure giant – are some of the best stocks to buy and hold for the long haul.
They provide essential services, are constantly growing their operations, and return tonnes of capital to investors through their dividends.
Another option investors have as a core portfolio investment is to buy ETFs that track index funds like the iShares S&P/TSX 60 Index ETF (TSX:XIU). Owning an ETF like the XIU gives you exposure to 60 of the largest stocks in Canada.
That means not only do you gain exposure to reliable businesses with years of track records, but you also gain instant diversification as well. And diversification is one of the most important factors Canadian investors need to consider when investing in their TFSAs.
Find the right balance of growth for your portfolio
Although it’s well known that younger investors typically prefer businesses with higher growth potential and a bit more risk, whereas retirees prefer safe investments that provide sustainable income, that doesn’t mean the latter should ignore growth altogether.
In fact, some of the best stocks to own, whether you’re early in your investing journey or approaching retirement, are dividend growth stocks, especially when investing in your TFSA.
Every dollar you receive and reinvest grows tax-free, which means that dividend stocks, especially dividend growth stocks, help you compound your capital faster than it could in any taxable account. That’s why these companies should be a core part of every Canadian investor’s approach to building their TFSAs.
Therefore, the best approach to building your TFSA is to keep things simple and find the right balance between safety and growth. That’s how you can protect your capital and ensure it has the best opportunity to compound over the long haul.
