The Tax-Free Savings Account (TFSA) is a powerful wealth-building tool for Canadian investors. Selecting the right investments can make it possible to build a TFSA balance that provides stable, growing income.
Part of the reason for that can be traced back to the main appeals of the TFSA. Both contributions and distributions can grow tax-free inside the account, and withdrawals are tax-free as well. This makes achieving that coveted TFSA balance goal easier than with other accounts.
All you need is to select the right investments. That’s where a smart TFSA strategy can start to support long-term retirement income.
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Why the right TFSA holdings matter
A large TFSA balance is helpful, but size won’t make a TFSA portfolio retirement-ready on its own. A $500,000 TFSA filled with higher-risk stocks will act differently from a TFSA built around diversified, lower-volatility income-producing assets.
That’s why investors need to move beyond the end balance and focus on the right investments. Fortunately, several great picks on the market can help grow that TFSA balance over time.
Here are three of those options to consider today.
Why invest in one stock when you can buy the whole market?
The first investment to help build your TFSA balance to retirement-ready status is a market ETF. Specifically, the iShares S&P/TSX 60 Index ETF (TSX: XIU). The iShares S&P/TSX 60 Index can serve as the foundation for any TFSA portfolio.
The fund tracks the performance of 60 of the largest, most established companies in Canada. This gives exposure to multiple sectors such as financials, industrials, materials, energy and telecom all from a single ticker.
Not only does this provide instant diversification, but it also gives investors immediate exposure to the largest and most successful businesses on the market.
In terms of income, the fund provides a respectable 2.2% yield. That’s not a huge return, but the focus of the fund isn’t income alone, but broad market exposure.
Perhaps more importantly, investors also get exposure to long-term growth. As of the time of writing, the fund’s 1-year return is just over 27%.
Add some big bank dividend power
Canada’s big bank stocks are almost always seen as some of the best long-term holdings to own. Bank of Montreal (TSX: BMO) is the oldest of the big bank stocks and offers something different to investors.
BMO offers investors diversified exposure to personal banking, commercial lending, wealth management, and capital markets. The bank also operates a growing international segment, which includes a presence in 32 state markets in the U.S.
As a dividend stock, BMO has been paying dividends for nearly two centuries without fail. That’s longer than any of its peers. The bank has also amassed a streak of consecutive annual increases over a decade.
As of the time of writing, BMO offers a quarterly dividend with a yield of 3%.
Long-term TFSA investors can collect that dividend tax-free or reinvest it to buy more shares. Over the longer term, that can compound into part of a larger income engine.
Invest in the largest defensive moat
Utility stocks are known as some of, if not the most, defensive picks on the market.
That’s where Fortis (TSX: FTS) comes in as the last piece to any TFSA balance. Fortis operates regulated utility assets across Canada, the United States, and the Caribbean.
The utility provides essential services, including electricity and gas, supported by long-term regulated contracts. For investors, this means that Fortis continues to generate a reliable and recurring revenue stream that allows it to invest in growth and pay a handsome dividend.
As of the time of writing, Fortis offers a 3.3% yield. Even better, the stock has provided investors with annual upticks to that dividend for over 50 consecutive years.
This makes Fortis a solid sleep-at-night component for any TFSA balance.
Build your TFSA balance
To retire comfortably in Canada, investors need an amount that can cover necessities and lifestyle. Often, any income generated from a TFSA will be augmented by CPP, OAS, and pensions.
Fortunately, investors can build a TFSA balance around investments like the trio above to generate recurring, stable income and make retirement more comfortable.
Note that investors who are not ready to draw on that income just yet can reinvest those dividends, allowing them to continue growing tax-free until needed.
