When you have decades to invest, one of the smartest things you can do is own high-quality businesses capable of compounding earnings and shareholder returns over time. In a Tax-Free Savings Account (TFSA), that compounding can become even more powerful because qualifying investment gains and income are generally sheltered from tax.
Source: Getty Images
A business built for the long haul
One Canadian stock that looks particularly well suited to this long-term strategy is Loblaw (TSX: L).
Loblaw is about as easy a business to understand as investors can find. Loblaw is Canada’s largest food and pharmacy retailer and operates more than 2,400 locations nationwide, serving millions of Canadians each week. About 90% of Canadians live within 10 kilometres of one of its stores.
Its grocery operations include familiar banners such as Loblaws, No Frills, Real Canadian Superstore, Maxi, and T&T. This segment generates roughly 70% of sales. The company also owns Shoppers Drug Mart (and Pharmaprix in Quebec), giving it exposure to pharmacies, health and beauty products, and convenience items. Loblaw also has a financial-services business through PC Financial and a valuable loyalty program: PC Optimum.
This combination gives Loblaw something investors should appreciate: recurring demand.
A proven compounder
People need groceries, medicine, and other everyday essentials regardless of whether the economy is booming or struggling. That doesn’t make Loblaw immune to economic pressures, but it can make its underlying business considerably more resilient than many cyclical companies.
And Loblaw has demonstrated its ability to turn that resilience into shareholder returns. Over the past decade, the company has increased adjusted earnings per share (EPS) at a compound annual growth rate of nearly 11%, while its dividend has grown at a similar pace. Loblaw has also increased its dividend for roughly 13 consecutive years.
The dividend yield, at only around 1%, certainly won’t attract income investors looking for immediate cash flow. But focusing solely on the yield misses the bigger picture. For a TFSA investor with a long time horizon, earnings growth, dividend growth, and capital appreciation can matter far more than today’s yield.
Consider the historical results. Over the past decade, with dividends reinvested, Loblaw stock generated annualized returns of roughly 18%. A hypothetical $1,000 investment would have grown to approximately $5,294. By comparison, iShares S&P/TSX 60 Index ETF (TSX: XIU), a broad Canadian-market benchmark, delivered annualized returns of less than 13%, turning $1,000 into about $3,327 over the same period.
Past performance, of course, doesn’t guarantee future returns. But it does illustrate the power of owning a business that consistently compounds.
A stock to accumulate patiently
The challenge is that a quality company like Loblaw rarely goes on sale. That makes dollar-cost averaging a sensible approach for investors who want to build a position without trying to perfectly time the market.
For example, an investor could contribute $200 each month through a commission-free brokerage like Wealthsimple, National Bank, or Bank of Montreal and steadily accumulate shares. At $62.73 per share at writing, the analyst consensus price target indicates roughly 10-15% potential upside over the near term.
The bottom line
Loblaw isn’t a flashy growth stock, and there are many other stocks that offer higher yields than Loblaw’s 1% dividend yield. But a resilient business, consistent earnings growth, rising dividends, and a long history of rewarding shareholders make it a suitable candidate for a long-term TFSA portfolio. Given enough time, Loblaw could prove to be the kind of dependable “BFF” investors are happy to keep around for decades.
