What TFSA Millionaires Understand That Most Canadian Investors Do Not

Are you one of Canada’s TFSA millionaires? That may sound like an unrealistic, unattainable goal at first. One of the reasons for that is the annual contribution limit of the TFSA restricts how much investors can add to their account.

In other words, even if you had a spare $1 million sitting around, you couldn’t just deposit it into the TFSA and start collecting tax-free income.

Instead, becoming one of the TFSA millionaires out there (yes, they exist) requires growing the investments already inside the account. That comes from contributing consistently, owning quality investments, reinvesting returns, and giving the portfolio time to grow.

Here are three investments that demonstrate those principles.

TFSA millionaires give compounding time to work

One of the biggest advantages of a TFSA is that any growth generated inside the account remains tax-free. That includes dividends, capital gains, and the additional returns generated when those earnings are reinvested.

Canadian National Railway (TSX:CNR) is a superb investment to help kickstart that long-term compounding.

Canadian National is one of the largest railways in North America. The company operates an extensive network that connects three coastlines across Canada and down through the U.S.

Canadian National’s network is huge and was built up over decades. This makes it difficult and expensive for any would-be competitor to replicate. Consequently, the railway enjoys an impressive defensive moat.

The goods that Canadian National transports is another benefit. Canadian National plays an essential role in moving everything from raw materials, finished products, automotive components, and consumer staples across the continent.

In total, the railway hauls over $250 billion worth of products across its network each year, regardless of how the market is faring.

That consistency has allowed Canadian National to return capital to shareholders through dividends and buybacks.

As of the time of writing, Canadian National offers a quarterly dividend with a yield of 2.1%. The company has also provided investors with three consecutive decades of annual increases to that payout.

On its own, Canadian National won’t make you one of Canada’s TFSA millionaires. The dividend isn’t that impressive. But consistent earnings growth and reinvestment make it a powerful long-term portfolio component.

Diversification can make it easier to remain invested

Another key fact that TFSA millionaires understand is that building wealth over time doesn’t require picking every winning stock individually.

That’s where iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC) comes into play.

The ETF offers a simpler alternative that’s based on the broader Canadian equity market. The fund provides exposure to over 200 holdings across multiple segments of the economy. That includes financials, energy, industrials, materials, and other major sectors.

That diversification helps to reduce the impact of problems affecting any single company. In other words, investors don’t need to constantly determine which bank, energy producer, or industrial stock will outperform next. Instead, investors buy the basket.

This makes the fund an ideal core TFSA holding that captures the long-term growth of the Canadian market. Over the trailing 12-month period, the fund has registered an uptick of 30%.

Diversification won’t protect a portfolio from every pullback, but it can make those periods easier to tolerate. TFSA millionaires know this.

Steady returns can still build serious wealth

TFSA millionaires know that portfolios don’t need to deliver explosive growth. Some holdings can contribute through stable income, dividend reinvestment, and steady capital growth.

Toronto-Dominion Bank (TSX:TD) fills that role perfectly.

TD is one of Canada’s big bank stocks. It has both a large Canadian personal and commercial banking business as well as growing operations in U.S. retail banking, wealth management, insurance, and wholesale banking.

That scale gives TD multiple sources of earnings rather than leaving it dependent solely on one business line. It also means that TD can offer investors a dividend that is both well-covered and growing.

In fact, TD has paid dividends without fail for 169 years and provided annual upticks for over a decade. As of the time of writing, TD’s yield works out to 2.6%.

Between the stable Canadian segment, growing U.S. presence and stellar dividend, TD is an option that both existing and prospective TFSA millionaires should consider.

Becoming one of Canada’s TFSA millionaires

TFSA millionaires recognize the value of time, diversification, and steady reinvestment. Canadian National, XIC, and TD take different approaches, but each can help investors remain focused on the long-term process.

Buy them, hold them, and watch your TFSA portfolio grow.

The post What TFSA Millionaires Understand That Most Canadian Investors Do Not appeared first on The Motley Fool Canada.

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More reading

• 5 TSX Dividend Stocks for Steady Cash Flow in Any Market
• 1 Way to Use Your TFSA to Double Your Annual Contribution
• Canadians: Here’s the TFSA Amount You Need to Retire, Plus 3 Stocks to Get There
• Top Canadian Dividend Stocks to Buy on a Pullback
• What Investors Should Understand About Canadian Bank Stocks This Year

Fool contributor Demetris Afxentiou has positions in Canadian National Railway and Toronto-Dominion Bank. The Motley Fool recommends Canadian National Railway. The Motley Fool has a disclosure policy.