Canadians in or nearing retirement likely have quite a lot on their minds. There is a lot of pressure that can come from entering retirement, and that usually comes with financial pressures. But if you have a Tax-Free Savings Account (TFSA), you’re already well ahead of the pack.
In retirement, you can use the TFSA to bring in passive income that could seriously transform your retirement. Set aside some cash to let it climb, reinvest dividends over a decade, and add just a bit of cash year after year. After just a decade, you could bring in passive income that will see you through all your days.
Stocks to consider
If you really want to transform your retirement through a TFSA, then I would recommend bank stocks right now. These are top performers that will only climb higher in the next decade. How can I be so sure? Because they’ve done it before.
Canadian banks are some of the best dividend stocks to consider because of the oligopoly among the banking industry in this country. There is far less competition here in Canada, as we don’t have as many banks. This has led to each bank creating provisions for loan losses that can last pretty much any downturn.
This included during the Great Recession. The banks dropped about 40%, before climbing back to pre-drop prices within a year of hitting those lows. This time, it’s far less serious for Canadian banks, which means now is a great time to buy.
Two bank stocks to buy
Among the bank stocks, the two I would consider these days are Canadian Imperial Bank of Commerce (TSX:CM) and Toronto-Dominion Bank (TSX:TD) for those seeking a huge deal. CIBC stock currently offers a dividend yield at 6.10% as of writing, with exposure to a housing recovery as well as a Canadian market recovery. Shares remain down 13% in the last year and up 3% year to date.
TD stock has a dividend yield at 4.85% as of writing for investors, with exposure to the recovery in the United States. This can bring it down now with a weakened dollar, but there will eventually be a recovery. When that happens, TD stock will soar back up. Shares are also down around 13% in the last year and down 10% year to date.
If you bought just one of these stocks…
Let’s say you went with the higher dividend here and chose CIBC stock for an investment. You decide to put some of your cash towards a recovery, reinvesting dividend income as you go. Furthermore, you then add $3,000 each year to the stock to see it increase higher and higher over the next decade.
CIBC stock should recover to pre-drop prices in the next year — a potential upside of 19% as of writing. From there, there is a compound annual growth rate (CAGR) of 6.6%, and dividend CAGR of 6.10% over the last decade. Here is what could therefore happen in the next decade should this all occur from a $20,000 investment.
| Year | Share Price | Shares Owned | Annual Dividend Per Share | Annual Dividend | After DRIP Value | Annual Contribution | Year End Stock Price | New Shares Purchased | Year End Shares Owned | New Balance |
| 1 | $57 | 299 | $3.48 | $1,040.52 | $18,083.52 | $3,000 | $67.83 | 59.57 | 358.57 | $22,124.15 |
| 2 | $67.83 | 358.57 | $3.69 | $1,323.94 | $25,645.74 | $3,000 | $71.94 | 60.1 | 418.67 | $29,969.37 |
| 3 | $71.94 | 418.67 | $3.92 | $1,640.14 | $31,759.47 | $3,000 | $76.30 | 60.81 | 479.48 | $36,399.28 |
| 4 | $76.30 | 479.48 | $4.16 | $1,992.95 | $38,577.32 | $3,000 | $80.92 | 61.7 | 541.18 | $43,570.32 |
| 5 | $80.92 | 541.18 | $4.41 | $2,386.62 | $46,181.00 | $3,000 | $85.83 | 62.76 | 603.94 | $51,567.56 |
| 6 | $85.83 | 603.94 | $4.68 | $2,824.79 | $54,659.67 | $3,000 | $91.03 | 63.99 | 667.93 | $60,484.62 |
| 7 | $91.03 | 667.93 | $4.96 | $3,314.66 | $64,115.68 | $3,000 | $96.55 | 65.41 | 733.34 | $70,430.71 |
| 8 | $96.55 | 733.34 | $5.27 | $3,861.26 | $74,661.85 | $3,000 | $102.40 | 67.01 | 800.35 | $81,523.41 |
| 9 | $102.40 | 800.35 | $5.59 | $4,471.14 | $86,423.82 | $3,000 | $108.60 | 68.79 | 869.14 | $93,894.50 |
| 10 | $108.60 | 869.14 | $5.93 | $5,151.62 | $99,541.30 | $3,000 | $115.18 | 70.77 | 939.91 | $107,692.77 |
At the end of a decade, investors would be bringing in annual passive income at $5,910.93 (after including the new shares), with a portfolio of $107,692.77! That will certainly help with TFSA income during retirement.
