Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

| More on:
Piggy bank with word TFSA for tax-free savings accounts.

Source: Getty Images

Many Canadians open a Tax-Free Savings Account (TFSA) to exploit its salient feature. You pay zero taxes on interest, capital gains, or dividend income earned from qualified investments inside a TFSA. Dividend investing is a proven strategy to maximize the benefits of the TFSA.

Also, the power of compounding comes into play when you reinvest the dividends instead of taking them. However, some ask if the TFSA balance can grow 10 times with regular contributions if money growth is tax-free. The answer is yes, but it is subject to specific parameters.

Dividend reinvesting

A one-time investment in a stock yielding 8% can compound 10 times over in a TFSA for approximately 30 years. The period shortens with a higher rate of return. Consider investing in Peyto Exploration & Development Corporation (TSX:PEY) today.  

At $14.99 per share, this mid-cap stock is up 34.2% year-to-date and pays a hefty 8.8% dividend. Because of the monthly payout frequency, you can reinvest the dividends 12 times a year, not four. You can transform a $5,000 TFSA into a retirement nest egg of $50,079.70 in 26.25 years. Assuming you maximize the yearly limits or contribute more in the ensuing years, the amount could be higher.

The $2.9 billion oil and natural gas producer focuses exclusively on the Alberta Deep Basin. Besides being Canada’s fifth-largest gas producer, Peyto is a low-cost operator. According to management, the low-cost operations and gas hedging program secures revenues and cash flows. They also strengthen the balance sheet, enable capital program funding, and sustain shareholder dividends.

Peyto’s growth catalyst is the ever-growing demand for natural gas. An added advantage is the superior margins compared to liquids-weighted producers. In the first half of 2024, earnings increased 3% year-over-year to $151.3 million, while funds from operations rose 12% to $359.5 million from a year ago.

Jean-Paul Lachance, Peyto’s President & CEO, said the growth prospects are rock-solid. Peyto’s new liquefied natural gas facilities in Canada and the U.S. will come online in the next few years. He added that the future demand for natural gas-fired power to meet expanding data centres and artificial intelligence requirements is encouraging for natural gas producers and their investors.

Market analysts covering the stock recommend a buy rating and see an upside potential of 19.6% to 46.8%. Their 12-month price target is between $17.99 (average) and $22 (high).

Alternative option

Rogers Sugar (TSX:RSI) is an alternative option for risk-averse investors. The consumer staple stock trades at $5.59 per share (+9% year-to-date) and pays a 6.4% dividend. Since the payout frequency is quarterly, a $5,000 investment will compound to almost $30,200 in 28 years with dividend reinvesting.

The $715 million company is Canada’s largest refined sugar distributor operating a low-growth but enduring business. Its President and CEO, Mike Walton, said the emphasis is to optimize the business to generate consistent, profitable, and sustainable growth. “We continue to expect positive demand trends for our sugar in the years to come,” he added. Additional investments and expansion are ongoing.

Unique and powerful

The TFSA is a unique and powerful savings tool. While the annual limit ($7,000 in 2024) appears small, regular contributions can help build retirement wealth over time.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Paper Canadian currency of various denominations
Dividend Stocks

Should You Buy the 3 Highest-Paying Dividend Stocks in Canada?

A few dividend stocks saw a sharp correction in November, increasing their yields. Are they a buy for high dividends?

Read more »

money while you sleep
Dividend Stocks

Buy These 2 High-Yield Dividend Stocks Today and Sleep Soundly for a Decade

These stocks pay attractive dividends that should continue to grow.

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

$15,000 Windfall? This Dividend Stock Is the Perfect Buy for Monthly Passive Income

If you get a windfall, after debt investing should be your next top option to create even more passive income!

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

3 Canadian Dividend Stocks for Worry-Free Income

These Canadian stocks have consistently paid dividends, generating a worry-free passive income for investors.

Read more »

people relax on mountain ledge
Dividend Stocks

Invest $10,000 in This Dividend Stock for $4,791.70 in Annual Passive Income

A dividend stock doesn't have to be risky, or without growth. And in the case of this one, the growth…

Read more »

ETF chart stocks
Dividend Stocks

2 Top TSX ETFs to Buy and Hold in a TFSA Forever

Don't get crazy. Just think simple growth with these two ETFs that are perfect in any TFSA.

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Use Your TFSA to Earn $900 Per Year in Tax-Free Income

This covered call ETF plus a TFSA could be your ticket to high tax-free passive income.

Read more »

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

How to Turn a $15,000 TFSA Into $171,000

$15,000 may not seem like a lot, but over time that amount can balloon into serious cash.

Read more »