A $7,000 Tax Free Savings Account (TFSA) contribution probably won’t produce enough income to replace a paycheque. It can, however, begin producing money before its owner finishes deciding what retirement is supposed to look like.
At a 3.3% dividend yield, $7,000 generates approximately $231 annually. That may not sound life-changing, but it’s only the starting income. Reinvesting the dividends can purchase additional shares, which can produce additional dividends, which can buy still more shares.
The account makes the process even more useful. Dividends and capital gains earned inside a TFSA aren’t taxed, while withdrawals don’t increase taxable income. Investors should confirm their available contribution room before investing, since the Canada Revenue Agency keeps better records than most of us keep receipts. The next decision is finding a dividend that looks capable of surviving long enough to compound.
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Start with the business
A large yield isn’t automatically a generous yield. Sometimes it is simply a share price declining faster than the dividend can wave for help. That’s why I prefer businesses with recurring demand, earnings that cover the payment, and a manageable valuation. The dividend doesn’t need to be enormous when the company can protect and gradually increase it.
The North West Company (TSX: NWC) currently offers that combination. North West operates grocery and general-merchandise stores serving northern Canadian communities, Alaska, the Caribbean, and the South Pacific. Many of its locations serve remote markets with limited competition, where food and household essentials remain necessary regardless of what the economy does.
A durable (but imperfect) retailer
North West’s first-quarter sales declined 1.5% year over year to $631.6 million. Foreign exchange and weaker Canadian operations created much of that pressure, including reduced funding from government programs serving some northern households.
The quarter wasn’t entirely gloomy. International same-store sales increased 4.3%, while company-wide gross profit rose 0.6% to $215.3 million. Merchandise changes, improved procurement, and a larger private-label assortment helped increase the gross-profit rate by 72 basis points.
Reported net earnings increased 5.4% to $29.2 million, partly because of a gain from selling a store in Guam. Adjusted earnings were weaker, so investors shouldn’t mistake accounting polish for uninterrupted operating growth. Still, North West’s essential retail demand and established market positions provide a sturdy foundation for the dividend.
What $7,000 could produce
North West stock pays a $0.41 quarterly dividend, or $1.64 annually. At a recent $49.38 share price, the stock yields approximately 3.3%. A $7,000 contribution would purchase 141 full shares for $6,962.58. Those shares could generate $231.24 annually, assuming the dividend remains unchanged.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| NWC | $49.38 | 141 | $1.64 | $231.24 | Quarterly | $6,962.58 |
An investor who doesn’t need the income could reinvest all four payments. Over time, dividend growth and additional shares could lift that initial $231 without requiring another contribution.
That said, at approximately 17 times trailing earnings, North West stock isn’t priced like an abandoned bargain. However, the valuation looks reasonable for a defensive retailer with limited competition in many of its markets.
Considerations
Operating remote stores is expensive. Fuel, freight, staffing, weather disruptions, and inventory losses can all pressure margins. Changes to government support programs may also affect customer spending, as the latest Canadian results demonstrated.
The dividend isn’t guaranteed, either. Anyone practising dividend investing should continue monitoring adjusted earnings, cash flow, and debt instead of assuming a long payment history makes future deposits automatic.
North West stock offers a 3.3% yield supported by essential retail demand, improving gross margins, and profitable operations. Its current challenges are real, but they don’t appear large enough to erase the company’s underlying advantages.
Bottom line
A $231 annual payout won’t fund an entire retirement. Reinvested tax-free and allowed to compound, however, it could become the first layer of an income stream that grows considerably more useful with time.
