“Long-term consistency beats short-term intensity.” This phrase of martial arts expert Bruce Lee holds true even in the investing world. You are better off getting a 6% annual return consistently over the long term than betting on the possibility of a 200% return in six months. The stock market has options for both investors. What matters is your financial needs. The Tax-Free Savings Account (TFSA) will help you make your strategy tax-efficient.
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Building a $25,000 TFSA balance from $7,000 in contribution room
The best use of a TFSA is investing in growth stocks, the ones that can convert $7,000 to $25,000. A 20% compounded annual growth rate (CAGR) over seven years can help you achieve that. And you don’t have to look far for a 20% CAGR. Some of the most obvious choices, like Shopify and Loblaw, can help you reach it.
The difficult part is retaining growth, because most growth is cyclical. Growth retention requires constant rebalancing of the portfolio. Whenever you buy a stock, you should study the growth drivers and risks that can pull back the stock price.
While staying invested for the long term is ideal for fundamentally strong stocks like Loblaw, seasonal and cyclical stocks can help you accumulate funds for your passive income pool.
For instance, 20% annual growth is possible in a seasonal stock like Air Canada (TSX: AC). The airline has shown financial resilience and significantly improved its balance sheet. It sees strong travel demand during the summer and holiday seasons. You can see a glimpse of it in the airline’s advance ticket booking reported in current liabilities. Every year may not be the same due to various reasons – immigration policies, geopolitical tensions, oil prices, pilot strikes, faulty engines, and more. But one of the two seasons plays out as the airline addresses the headwinds.
You could consider buying Air Canada stock in seasonally weak March or August and selling it in the summer or holiday season rally of June or December. Buying below $18 and selling above $23 can earn you a 28% return. A similar technique could work for Shopify, buying the March dip and selling the November and February rally, to earn as much as 50% upside depending on consumer confidence. Such stocks work on investing intensity. Thus, they need rebalancing.
Converting a $25,000 TFSA balance to a consistent cash flow
Now for the challenge of retaining the upside. The best way is to convert the booked profits into a passive income portfolio of dividend aristocrats that offer consistency.
CT REIT (TSX: CRT.UN) offers a 5.4% yield and grows its dividend every July. Its assured 90% rent from its parent, Canadian Tire, provides assurance of funds from operations. As a trust, CT REIT should distribute a major portion of its earnings to unitholders to enjoy tax-free earnings, or else it will have to pay the highest tax on retained earnings.
CT REIT can convert your growth into monthly cash flows that grow with inflation. It has been paying and growing distributions consistently for 13 years.
Another good dividend stock is Canadian Natural Resources (TSX: CNQ). The share price has corrected 14% from the March high. The US-Iran war created an energy supply shock, sending all energy stocks to very high valuations. At that time, it didn’t make investing sense to buy Canadian Natural Resources. However, the correction has once again made the stock feasible. You can lock in a 4.2% dividend yield and a 6–10% average annual dividend growth, which can help you generate inflation-adjusted passive income.
| Stock | Average stock price in May | Dividend per share | Number of shares bought | Total Investment | Total Dividend Amount |
| CRT.UN | $18.30 | $0.982 | 683 | $12,500.00 | $670.71 |
| CNQ | $58.00 | $2.50 | 216 | $12,500.00 | $540.00 |
| Total | $25,000.00 | $1,210.71 |
A $12,500 investment in each stock can generate $1,210 in dividends paid out as monthly and quarterly cash flow that will grow every year.
