TFSA Pension Wealth: How $20,000 Can Grow to $580,000 in 20 Years

A proven savings technique can help Canadian savers use their TFSA to build substantial funds for retirement.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Canadians of all ages are looking for ways to boost the size of their retirement fund.

Younger investors are particularly concerned, as many do not have generous company pensions. Businesses that used to readily hire new grads to full-time jobs now prefer to offer contract work before adding permanent staff.

When a secure job is offered, it normally comes with a defined contribution pension plan, where the firm matches an employee’s pension contributions to a certain limit. That’s okay and can be adequate to meet savings needs, but the payouts at retirement depend on the value of the fund, rather than being guaranteed by the company.

The emergence of the gig economy in recent years has provided additional flexibility and challenges. People have more options to work when they want, but the result is a significant rise in the number of the self-employed, who have no benefits at all, let alone a pension plan.

In this situation, the responsibility for setting cash aside for the golden years sits squarely on the shoulders of the individual.

Even people with company jobs and a pension are wondering if they will be able to maintain a comfortable lifestyle in retirement. A growing number of Canadians retirees are making mortgages payments, and that trend is expected to continue with the increased cost of housing.

Overall, there is a widespread desire to boost personal pension portfolios.

One strategy is to buy dividend stocks inside a Tax-Free Savings Account (TFSA) and use the distributions to acquire more shares in the company. This harnesses a powerful compounding process that can turn a relatively modest initial investment into a significant fund over the course of 20 or 30 years.

Let’s take a look at one top Canadian dividend stock that has delivered impressive returns and should continue to be a solid pick for a TFSA retirement fund.

Canadian National Railway (TSX:CNR)(NYSE:CNI) was hit with a week-long strike in the fourth quarter of 2019 that hurt results for the period and had an impact on full-year 2019 results.

The one key thing that emerged from the shutdown is the fact that CN is an essential part of the efficient operation of the Canadian and U.S. economies. This is important for investors, as it highlights CN’s competitive advantages and long-term potential to grow.

CN is the only North American rail carrier with lines that connect ports on three coasts. New lines are not going to be built by a competitor to serve the same routes, so the company enjoys a wide moat.

That said, CN still has to compete with trucking companies and other railways along some routes. This forces management to make the necessary investments to ensure CN remains at the top of its class.

Despite the challenging fourth quarter, CN still generated adjusted net income of $4.19 billion in 2019 compared to $4.06 billion in 2018. Free cash flow in 2019 was just under $2 billion, and CN is targeting free cash flow of $3-$3.3 billion in 2020.

CN is generous with its profits. The board has increased the dividend by a compound annual rate of about 16% over the past 20 years. It raised the distribution by 18% in 2019 and just raised it by 7% for 2020. The 2021 hike should be back in line with the long-term average, assuming CN hits the free cash flow guidance.

A $20,000 investment in CN two decades ago would be worth $580,000 today with the dividends reinvested.

The bottom line

There is no guarantee CN will generate the same returns over the next 20 years, but the stock deserves to be part of a balanced TFSA dividend fund.

The TSX Index is home to many top dividend stocks and the strategy of investing the distributions in new shares is a proven one to create wealth.

Should you invest $1,000 in Chemtrade Logistics Income Fund right now?

Before you buy stock in Chemtrade Logistics Income Fund, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Chemtrade Logistics Income Fund wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,058.57!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 38 percentage points since 2013*.

See the Top Stocks * Returns as of 2/20/25

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.

David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway. Fool contributor Andrew Walker has no position in any stock mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

dividends grow over time
Dividend Stocks

Income Investors: These Canadian Dividend All-Stars Are Raising Payouts Again

Long-term income investors can consider these Canadian dividend all-stars that are trading at good valuations.

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

Here’s How Many Shares of ZMI You Should Own to Get $500 in Monthly Dividends

This BMO monthly income ETF is diversified and easy to understand.

Read more »

dividends can compound over time
Dividend Stocks

Tariff Risks Are Rising: Here’s How to Stay Ahead as an Investor

Are you worried about tariffs? Worry no more and protect yourself with these three stocks offering protection.

Read more »

investor looks at volatility chart
Dividend Stocks

Market Correction: 3 Canadian Stocks to Buy Before Prices Rebound

These three Canadian stocks certainly offer a lot to investors, such as stability and value, but growth is definitely in…

Read more »

a person prepares to fight by taping their knuckles
Dividend Stocks

Tariff Trouble: How Canadian Investors Can Protect Their Portfolios

Canadian investors can protect themselves against Trump tariffs through diversification.

Read more »

Young Boy with Jet Pack Dreams of Flying
Dividend Stocks

Here’s How Many Shares of Peyto You Should Own to Get $100 in Monthly Dividends

Peyto Exploration and Development stock offers investors monthly income and exposure to the strong natural gas market.

Read more »

space ship model takes off
Dividend Stocks

Why Magellan Aerospace Could Be the Hottest TSX Stock in 2025

An industry consolidator with visible earnings growth could be the hottest TSX stock in 2025.

Read more »

sale discount best price
Dividend Stocks

TSX Sell-Off: These 2 Oversold Stocks Look Like Bargains Today

These Canadian stocks that have slipped into oversold territory but could offer promising value.

Read more »