Tfsa Investing: How To Use Dividend Stocks To Build Significant Retirement Savings

Canadian investors can use their self-directed Tax-Free Savings Account (TFSA) today to start a retirement fund that can provide extra income to complement CPP, OAS, and company pensions.

One popular strategy to achieve this goal involves owning top TSX dividend stocks inside a TFSA and using the distributions to buy more shares.

TFSA benefits

The TFSA limit in 2026 is $7,000. This brings the cumulative maximum contribution space per person to $109,000 for anyone who has qualified each year since 2009 when the government launched the TFSA.

All dividends, interest, and capital gains earned inside the TFSA are tax-free and can be removed as income or reinvested to grow the savings. Any amount withdrawn from a TFSA automatically opens up an equivalent amount of contribution room in the following calendar year, in addition to the regular TFSA contribution limit increase.

These characteristics give investors good flexibility. In addition, there isn’t any concern that the earnings on the investments will bump you into a higher tax bracket, or put OAS at risk of a clawback.

Power of compounding

Young investors can start with relatively modest amounts of money to create their TFSA pension. When the funds are invested in top dividend-growth stocks and the dividends are used to acquire new shares, the compounding process can generate significant savings over the course of 20 or 30 years.

The effect is enhanced when dividends are raised at a steady pace and the share price drifts higher, which is typically the case for companies that have long track records of dividend growth. This doesn’t mean the share prices can’t experience extended pullbacks. Those events are going to occur as part of the broader market and industry cycles, but dips enable the dividends to buy even more stock. Over the long run, stocks of solid dividend-growth companies typically recover from corrections to set new highs.

A dividend growth king

Fortis (TSX: FTS) is one example of a top TSX dividend-growth stock that has made some long-term investors quite rich. In fact, a $10,000 investment in Fortis 30 years ago would be worth about $300,000 today with the dividends reinvested.

The company has increased its dividend annually for the past 52 years. Dividend growth is expected to be 4% to 6% per year through at least 2030, supported by the $28.8 billion capital program. Fortis is expanding its utility assets, which include electricity and natural gas distribution businesses, electricity transmission grids, and power generation facilities.

The nearly $80 billion in assets is primarily spread out across Canada and the United States. Fortis is a good stock to own if investors want exposure to economic growth in the United States through a top Canadian utility.

Fortis hasn’t made a major acquisition for several years, but it has a good track record of making successful purchases. Consolidation in the American utility sector could ramp up in the coming years as demand for electricity and natural gas is expected to increase with the expansion of AI data centres and the need for upgraded infrastructure.

Fortis trades near $75 per share at the time of writing. The stock is down from the 2026 high around $83 and now provides a dividend yield of 3.4%.

The bottom line

The strategy of owning top TSX dividend-growth stocks and reinvesting dividends has proven to be successful for many patient investors. While there is no guarantee that Fortis will deliver the same returns over the next three decades, the company still deserves to be on your radar for a diversified buy-and-hold TFSA portfolio.

The post TFSA Investing: How to Use Dividend Stocks to Build Significant Retirement Savings appeared first on The Motley Fool Canada.

More reading

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• Why Utility Stocks Are Looking Good Right Now
• When the Market Drops, This Dividend Just Keeps Showing Up
• TFSA Passive Income: 2 Canadian Dividend Stocks for Retirees
• Weird Economy? This Dividend Is the Calm in the Storm

Fool contributor Daniel Da Costa has no position in any of the stocks mentioned.  The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.