The Tax-Free Savings Account (TFSA) is one of the most powerful tools Canadians have for building long-term wealth. Yet many Canadians still leave valuable contribution room unused. For those looking to retire more comfortably, there is a simple strategy worth considering: invest for the long term, reinvest the income, and let compounding do much of the heavy lifting.
Maximizing your annual TFSA contribution is an important first step. But what you do with that money matters just as much. Instead of regularly withdrawing dividends or other investment income, investors can reinvest those distributions and allow their holdings to compound tax-free over decades.
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Focus on quality, not just potential returns
Stocks have historically delivered strong long-term returns, but not every stock belongs in a retirement-focused portfolio. Companies with excessive debt, highly cyclical businesses, or aggressive acquisition strategies can expose investors to considerably more risk.
That doesn’t mean higher-risk stocks should always be avoided. Risk can create opportunity, particularly when investors buy quality businesses at attractive valuations. However, a TFSA strategy designed to support a more comfortable retirement may benefit from emphasizing durable companies that can grow earnings while returning capital to shareholders.
That’s where dividend-paying stocks may be suitable. Investors can potentially benefit from both capital appreciation and a growing stream of passive income. Better still, reinvesting those dividends can accelerate the compounding process.
One Canadian stock that deserves consideration is Intact Financial (TSX:IFC), Canada’s largest provider of property and casualty insurance and a major specialty insurer across North America, the U.K., and Europe.
Intact Financial looks like a long-term compounder
Intact Financial shares have recently come under pressure after higher catastrophe losses hurt second-quarter (Q2) results. Severe weather in Canada, including wind and flooding, combined with commercial fires in the U.K. and Ireland, resulted in substantial claims. Q2 earnings fell 17% year over year to $720 million, prompting investors to sell the stock.
However, one difficult quarter doesn’t necessarily undermine the long-term thesis. Intact’s combined ratio remained below 100% at 94.9%, meaning the insurer was still profitable on its underwriting operations. For the first half of the year, net income declined just 5% to $1.5 billion, while the combined ratio improved to 93.1%.
Intact Financial also continues to generate impressive returns. Its trailing-12-month return on equity (ROE) stood at 17.2%, while its 10-year average ROE outperformed its benchmark by 670 basis points. Over the past decade, net operating income per share increased at a compound annual growth rate (CAGR) of more than 12%, while the dividend grew at more than 10% annually.
Intact Financial is also working to manage future risks through vertically integrated claims supply chains, pricing adjustments supported by artificial intelligence (AI), and portfolio restructuring.
A potential buy-the-dip opportunity
After falling roughly 11%, from around $300 to $267 per share, Intact Financial could offer long-term TFSA investors an opportunity to buy a high-quality dividend grower at a more attractive valuation. Further volatility is certainly possible, particularly given the unpredictable nature of catastrophe losses, but that’s precisely why a long-term mindset matters.
The stock currently yields roughly 2.2% and has increased its dividend for two decades, with an impressive 11.1% annualized dividend-growth rate over that period. Meanwhile, the analyst consensus price target implies approximately 22% potential upside.
The bottom line
For Canadians using a TFSA to prepare for retirement, the strategy doesn’t have to be complicated: own quality businesses, reinvest the income, and give compounding time to work. Intact Financial combines a strong competitive position, consistent profitability, dividend growth, and long-term earnings growth. Its recent weakness may therefore be less of a reason to worry and more of an opportunity to consider adding a quality compounder to a TFSA for the years ahead.
