Tips for your TFSA
Since its inception in 2009, the TFSA has helped Canadians save thousands of dollars in taxes. Since there are new TFSA contribution room each year, Canadians should contribute to the account each year to get the tax-free membership started as soon as possible.
Canadians who have been eligible for a TFSA since 2009 and who have never contributed to a TFSA will have accumulated $ 69,500 in tax-free investment margin.
|An||TFSA contribution limit for each year|
|2009-2012||5 000 $|
|2013-2014||5 500 $|
|2015||10 000 $|
|2016-2018||5 500 $|
|2019-2020||6 000 $|
|Total||69 500 $|
Canadians can use the TFSA to meet their financial goals, like saving for a down payment for a home or even saving for retirement. The TFSA is also flexible in that you can withdraw funds tax-free and return the amount in a future year.
Of all asset classes, equities offer the best long-term returns. Stock prices are volatile in the short term but follow the fundamentals of the company over the long term. A proven strategy for generating more consistent returns is to invest in quality dividend paying stocks.
A top dividend-paying stock for your TFSA
You want dividend paying stocks that guarantee safety of principal and dividends. Now, Manulife (TSX: MFC) (NYSE: MFC) delivers just that. Even during this pandemic, its income has been extremely resilient.
Specifically, Manulife has reported net income of $ 4.6 billion in the past 12 months. Since the insurer only pays about 46% of its profits as dividends, its cash distribution is very secure.
At $ 21.58 per share, MFC shares are very cheap – trading at around seven times its normal multiple. This is an incredible discount to its intrinsic value, assuming a multiple of about 11.3 times normal profit.
Manulife is also a Canadian dividend aristocrat who has increased his dividend for six consecutive years. Its quarterly dividend of $ 0.28 per share is 12% higher than a year ago.
Due to the reduction in stocks and its large dividend, Manulife stocks can generate total returns of over 17% per year over the next five years. Investors will get at least a consistent return from its generous dividend which is earning 5.2% at the moment.
Increase your TFSA from $ 6,000 to $ 300,000
If you start with a TFSA of $ 6,000 this year and continue to contribute $ 6,000 a year, you will reach over $ 300,000 in 18 years with a 10% rate of return.
If you are able to invest 17% per year, like maybe our Manulife example, you will instead get a TFSA of + $ 300,000 in 14 years!
Going forward, the TFSA will be tax free of at least $ 6,000 each year. This means that you will have multiple opportunities to grow from $ 6,000 to $ 300,000! Four times $ 300,000 already amounts to more than $ 1,000,000. In other words, you can potentially come up with a TFSA portfolio of $ 1,200,000 over the next 20 years or so with just $ 6,000 in annual contributions over four years.
Takeaway for investors
Save and invest as much as possible in your TFSA. In the first few years of your investment journey, your savings are extremely important. Use the savings to invest in high dividend stocks like Manulife – stocks that trade at good valuations and offer a good dividend.
Dividends can help you buy new stocks in major dividend paying stocks. Only withdraw money from your TFSA in an emergency, as you would like your money to grow tax-sheltered for as long as possible, possibly until retirement.
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Fool contributor Kay Ng owns shares of MANULIFE FIN.