The Tax-Free Savings Account, or TFSA, is a popular registered account in Canada. It allows Canadian residents to invest in a variety of asset classes, such as stocks, bonds, mutual funds, and exchange-traded funds, and generate tax-free returns for life. Due to its tax-sheltered status, the TFSA can be a valuable investment tool, making it extremely popular among Canadians.
According to the Canada Revenue Agency (CRA), the TFSA contribution limit for 2025 has increased to $7,000. So, if you were eligible to contribute to the registered account since it was introduced in 2009, the cumulation TFSA contribution limit will increase to $102,000 next year.
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How to invest $7,000 in 2025?
There are several ways to use the TFSA contribution room and generate inflation-beating returns over time. One strategy is to buy and hold low-cost passive funds that track indices such as the S&P 500.
Among the most popular indices in the world, the S&P 500 provides you with exposure to some of the largest companies in the world. For instance, “The Magnificent Seven” companies, including Nvidia, Apple, Microsoft, Meta, Alphabet, Amazon, and Tesla, account for over a third of the index.
Investors should consider allocating a majority of their holdings towards diversified index funds and benefit from the power of compounding. Moreover, this strategy will help you beat most fund managers on Wall Street, given over 80% of large-cap funds failed to outpace the S&P 500 index.
An annual investment of $5,000 at the start of the year since 2009 would be worth around $211,316 today. The total return on investment is 181.75%, while the approximate internal rate of return is 10.83%.
This strategy has almost tripled your investment, as for every $1 invested, you would have earned $2.82 today. Further, $5,000 invested in January 2009 would have ballooned to $31,487, showing that earlier investments had significantly more time to compound.
While past performance does not guarantee future returns, the S&P 500 is well-diversified and has showcased an ability to deliver steady returns over several decades.
Invest in quality dividend stocks
TFSA holders with a sizeable risk appetite can buy and hold quality dividend stocks to benefit from a steady stream of dividend income and long-term capital gains. One such blue-chip dividend stock is Enbridge (TSX:ENB), which offers you a yield of over 6%.
An investment of $2,000 in ENB stock 30 years back would be worth $33,800 today. However, if we adjust for dividend reinvestments, cumulative returns are closer to $126,000. Enbridge has raised its dividends each year for the last 29 years. Moreover, these payouts have risen at an average annual rate of 10%, significantly enhancing the yield at cost.
Enbridge is a diversified energy infrastructure company that continues to invest heavily in organic growth and acquisitions. These investments should help it boost future cash flows, earnings, and dividends.
Analysts tracking ENB stock expect adjusted earnings to expand from $2.78 per share in 2024 to $3.25 per share in 2026. So, priced at 18.8 times forward earnings, ENB stock is reasonably priced. Additionally, it is forecast to invest more than $15 billion in capital expenditures between 2024 and 2026, making it a top stock for TFSA investors right now.
