Okay by popular request I’m going to dive a bit deeper into how on I managed to build my TFSA to almost $100K balance since I started it back in 2009 despite only contributing $57,500. My annual return has been 10.5% since 2012 (I would have to dig in my archive to pull out the earlier years but you get the idea).
Honestly the first thing you should do to get an high TFSA balance is to use your full contribution limit each and every year as soon as possible. Letting the contribution room build up is like letting dust bunnies grow behind your furniture. It doesn’t help anyone. If you don’t use it it won’t have compounding growth which keeps the balance growing.
You also have to decide what exactly your TFSA is going to be for your overall financial plan. You can use it to park your emergency savings but that will result in your having less growth. In my case, both my wife and I decided that the TFSA would be for income purposes. We wanted to generate a steady stream of income from our accounts to help fund our retirement. So while it grew fairly quickly since 2009 we do expect it to slow down going forward as we start to take money out of the accounts.
Now the third key thing to is to accept that if you want a big balance you are going to have to take some risks. Using your TFSA as a high interest savings account or GICs is dooming your balance to stay low. There is nothing wrong with those investments depending on your objectives for your money just don’t be so conservative that you are losing to inflation each year. As I mentioned above our objective was income so we started off with individual stocks of dividend paying companies.
To find the companies that we would end up investing in we looked at our own bills we paid each month and bought in similar sectors. After all monthly bills often mean long term clients that pay regularly into the business which gives the company cash to pay out dividends. So we ended up looking at banking, insurance, telecommunications, utilities, oil and gas, and real estate income trusts. We then looked to have at least two different companies for each sector we invested in as we didn’t want to have all our eggs in one basket. Also we tend to look towards higher yield companies as we planned the TFSAs as our highest risk accounts so we expected to be compensated for that risk (we typically looked at companies with about a 5% or higher yield). Please note yield for a stock is just the dividend payout annually divided by the share price shown in percentage. A high yield can be the result from a company having a period of bad news that temporarily drives down the share price.
Once we identified a potential company in a sector by yield we would then pull open its last annual report and flip to its asset and debt balance sheet and look for its retained earnings. A good value here usually indicates the company is sitting on some cash so in event of a downturn in their business they can keep paying their dividend. If the retained earnings were low and the debt levels were high we would often avoid buying the company. Also at this time we would take a look at how long has the company been paying a dividend and how often they increase it. Steady dividend growth often means a decent growth in the company overall which is good for the share price in the long term (and your TFSA balance if you buy shares in the company).
Later on we added an ETF of preferred shares to our TFSAs instead of bonds to give a bit more balance to the risk profile of the accounts but still focus on producing income.
Then the last factor in getting a high TFSA balance is: luck. You occasionally will pick a company that does REALLY well the spikes your balance. For me it was AQN (Algonquin Power & Utilities Corp) which I managed to buy when it was under a cloud of doubt due its debt level but the overall numbers looked fairly good and utilities have very dependable cash flows. My yield based on my purchase price is somewhere above 10% now. For my wife, she bought MFC (Manulife Financial Corp) and the share priced increased by around 30%. So yes, that is hard to predict but it does occasionally happen.
So what do you use your TFSA for and are you happy with your return?