Investing in shares of fundamentally strong Canadian stocks with a history of consistently outperforming the broader markets can help you create a significant amount of wealth in the long term. Furthermore, investors can leverage the TFSA (Tax-Free Savings Account) to enhance their overall returns and earn tax-free capital gains.
With the 2024 TFSA dollar limit set at $7,000, let’s consider two Canadian stocks to invest in now.
TFSA stock #1
Dollarama (TSX:DOL) is a top stock for TFSA investors to earn solid tax-free capital gains and dividend income. Furthermore, its low-risk and defensive business model will add stability to your TFSA portfolio. Sporting a market cap of over $31 billion, shares of this discount store operator have grown at a compound annual growth rate (CAGR) of nearly 23% in the past decade, delivering a capital gain of over 690%.
Dollarama sells a wide range of products at low and fixed price points. This strategy drives traffic to its stores regardless of market conditions, enabling it to generate strong sales and earnings and supporting its share price. Notably, Dollarama’s top and bottom lines have increased at a CAGR of about 10% and 16%, respectively, since 2011. Thanks to its growing earnings base, Dollarama enhanced its shareholders’ returns through higher dividend payments. Notably, the company has increased its dividend 13 times since 2011.
In the future, Dollarama’s value pricing strategy, large and growing store base, direct sourcing strategy, and a growing footprint in high-growth Latin American markets will augur well for revenue and earnings growth. Further, its extensive loyal customer base, focus on optimizing its operations, and increasing efficiency support my optimistic outlook on Dollarama stock.
Dollarama stock is trading at the next 12-month price-to-earnings multiple of 27.8, which is relatively lower than its historical average and offers a good buying opportunity.
TFSA stock #2
TFSA investors could consider investing in the shares of the e-commerce platform provider Shopify (TSX:SHOP). Shopify has grown at a CAGR of approximately 28% in the past five years, delivering capital gains of about 242%. This includes the significant correction in Shopify stock in the post-pandemic era.
Notably, Shopify’s dominant positioning in the e-commerce space, focus on innovation and product expansion, introduction of new merchant features, and incorporation of artificial intelligence technology in its offerings position it well to capitalize on the digital shift and add more merchants on its platform. Besides growing merchants, Shopify stands to benefit from the potential increases in subscription fees, which will cushion its earnings.
Further, Shopify’s focus on cost reduction and shift towards an asset-light business model positions it well to generate sustainable earnings in the long term.
Overall, the growing share of e-commerce in overall retail sales bodes well for Shopify’s growth. Moreover, Shopify’s strong competitive positioning, expanding merchant base, cost control, and improving take rate provide a solid foundation for growth.
It’s worth noting that Shopify stock is trading a next 12-month enterprise value to sales multiple of 10.1, roughly half its historical average. This implies that Shopify stock is trading cheaply and provides a solid entry point near the current levels.
