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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.
