The Tax-Free Savings Account (TFSA) is one of the most underused Canada Revenue Agency (CRA) benefits, especially among Gen Zs and millennials. A TD Bank Survey found that Gen Zs and Millennials don’t invest but rather put their money in the TFSA as a normal savings account to be withdrawn later. It is only when people are near retirement that they make the best use of their TFSA.
If you understand how a TFSA can enhance the power of compounding with its tax-free investment growth and withdrawals, you will never leave the contribution room unused.
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The one stock to keep inside a TFSA forever
A TFSA allows you to grow your investments tax-free. Which means you pay no tax on dividends, interest, and capital gains. However, you cannot trade in a TFSA as stock trading is considered business income and not investment income. An investment requires you to hold the stock for at least a few months to a year before selling it.
One stock you might want to keep inside a TFSA forever is Canadian Natural Resources (TSX:CNQ). It is a high dividend growth stock that can help you compound your TFSA with its dividend income.
The dividend growth side of CNQ Stock
Canadian Natural Resources has what many energy companies don’t. A low-cost advantage. It has low maintenance, high-value reserves, and an extensive infrastructure to produce and store natural gas and oil. This advantage has helped the company generate profits from the energy transition from oil to natural gas and grow dividends between 2% and 50% in the last 25 years. In 21 of these 25 years, the company has delivered double-digit dividend growth.
This growth is higher than the market’s. Suppose you invested $10,000 in Canadian Natural Resources and $10,000 in the TSX 60 Index in 2010. Canadian Natural Resources would be generating an annual dividend of $1,357.50 today, and the investment would be worth $36,505. The same amount in the TSX 60 Index would have become $26,988, with no dividend.
CNQ’s 0.8% dividend yield in 2010 is now a 13.6% yield, as the dividend grew at an average annual rate of 21%. When it comes to dividend growth stocks, never look at the yield but at the growth rate.
How to optimally use CNQ stock in a TFSA
Canadian Natural Resources does not offer a dividend reinvestment plan (DRIP). However, the dividend income from CNQ can be used to buy other growth and cyclical stocks. That can help you compound your returns. Some interesting cyclical stocks to consider are Air Canada, which tends to rise in July and December, the peak seasons. Another stock worth buying in the March–June dip is Shopify, as it tends to rise in the holiday season of November and February.
You could also consider investing the CNQ dividend amount in opportunistic buys, like Topicus.com and Micron Technology. Topicus.com is a long-term growth stock that increases cash flow by acquiring software companies with regular and sticky cash flows. Micron is a cyclical buy as growing demand for memory chips from data centre spending has created a supply shortage. Micron stock is falling amidst the developments around the Iran war. However, its secular growth remains intact, creating a buying opportunity.
The one dividend stock that you keep forever in the TFSA can help you build up a sizeable portfolio. It is not where you invest but how you invest that makes the difference.
