TFSA 2020 Contribution Limit: How to Turn $6,000 Into $64,000

The TFSA contribution limit will increase by $6,000 in 2020. How should you invest the funds?

| More on:

The Canadian government just announced the annual TFSA contribution limit for 2020 will be $6,000.

The TFSA was launched in 2009 as a tool to help Canadians save money for a wide variety of financial goals. Inside the TFSA, any interest, dividends, or capital gains that are generated on investments are tax-free.

This makes the TFSA a great vehicle for setting cash aside for big projects, such as a downpayment on a house, or to build a self-directed retirement fund.

Investors who think they will need the cash in the next couple of years should probably put the money in GICs or other short-term fixed-income products. The return isn’t great, but you protect the full value of the investment. In this case, the TFSA is essentially just a holding tank for your funds.

In cases where investors plan to keep the funds in the TFSA for decades, a better approach might be to buy quality dividend stocks and use the distributions to acquire more shares. This strategy takes advantage of a powerful compounding process that can turn small initial investments into large savings funds over time.

When you decide to remove the money, all of the gains are yours to keep. This is where the TFSA differs from the RRSP. Contributions placed in RRSP accounts can be used to reduce taxable income now, but the withdrawals are taxed.

Which stocks should you buy?

The best companies tend to have proven track records of dividend growth supported by rising revenue and higher earnings. Let’s take a look at two stocks that might be interesting TFSA picks.

TD

Toronto Dominion Bank (TSX:TD)(NYSE:TD) is known as a giant in the Canadian banking industry, but it also has a large U.S. presence. TD’s U.S. operations give investors a great opportunity to get exposure to the U.S. economy through a Canadian stock.

TD is very profitable and does a good job of returning earnings to shareholders through buybacks and higher dividends. The board has raised the dividend by a compound annual rate of about 11% over the past 20 years. Investors should see the payout continue to grow in line with expected annual earnings-per-share increases of 7% to 10%.

The existing dividend provides a yield of 3.8%.

A $3,000 investment in TD two decades ago would be worth about $25,000 today with the dividends reinvested.

Fortis

Fortis is a utility company with more that $50 billion in assets located in Canada, the U.S., and the Caribbean. The businesses include natural gas distribution, power generation, and electric transmission companies.

Dividend investors are attracted to the reliable revenue stream. Fortis gets most of its cash flow from regulated assets, meaning pricing and profits are normally predictable.

The board has raised the dividend every year for more than four decades. The current distribution provides a yield of 3.7%.

A $3,000 investment in Fortis 20 years ago would be worth $39,000 today with the dividends reinvested.

The bottom line

A $6,000 investment equally split between TD and Fortis just 20 years would now be worth $64,000. As you can see, it doesn’t take much money to build a significant fund when you buy the right stocks.

There is no guarantee these two companies will perform the same in the next two decades, but both should continue to be solid picks for a balanced TFSA portfolio focused on dividends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stock mentioned.

More on Dividend Stocks

profit rises over time
Dividend Stocks

These 2 Dow Stocks Are Set to Soar in 2025 and Beyond

Two Dow Jones stocks are screaming buys but Canadians must hold them in an RRSP or RRIF to avoid paying…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How to Use Your TFSA to Earn Ultimate Passive Income

If you have a TFSA, then you have the key to creating ultimate passive income. All you need is a…

Read more »

Confused person shrugging
Dividend Stocks

Better Buy: Fortis Stock or Hydro One Stock?

Let's do a compare and contrast of these two top utilities stocks right now, shall we?

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

Boost Your Passive Income: 2 Canadian High-Yielders at a Bargain

Nutrien (TSX:NTR) stock and another play that appear like fantastic dividend bargains in mid-November.

Read more »

3 colorful arrows racing straight up on a black background.
Dividend Stocks

TSX Stocks Soaring Higher With No Signs of Slowing

Three TSX stocks continue to beat the market and could soar higher in an improving investment landscape.

Read more »

Hourglass and stock price chart
Dividend Stocks

Goeasy Stock: Is It Heading for a 52-Week High?

Goeasy stock has been edging higher, especially after another record-setting earnings report. So are 52-week highs in sight?

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Here’s the Average TFSA Balance at Age 44 in Canada

You can invest your TFSA in funds like the BMO Canadian High Yield Dividend ETF (TSX:ZDV) to grow the balance.

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

The Best Telecom Stock to Buy Before 2025

Choosing the safest stock from a decimated sector can be tricky, but if there is a reasonable chance of full…

Read more »