Since its inception in 2009, the Tax-Free Savings Account (TFSA) has been a game-changer for Canadian investors. It allows your money to grow tax-free, whether you're investing in stocks, exchange-traded funds (ETF), or bonds, making it one of the most flexible and advantageous tools for wealth building.

In fact, if you started contributing to your TFSA from the beginning and maxed out the yearly limit every year, you'd have invested a cumulative $95,000 by 2024. This calculation factors in annual contribution increases, which have ranged from $5,000 in its early years to $10,000 in 2015 and now stand at $7,000 for 2024.

How much could you actually earn

This sizeable contribution room provides a powerful opportunity for Canadians to grow their wealth. But just how much could you have in your TFSA today? Assuming an average annual return of 6%, a modest target for diversified portfolios, the original contributions could have grown to well over $160,000. For those who consistently reinvest dividends and optimize their investment choices, the potential could be even greater. In fact, it seems that the Canada Revenue Agency (CRA) only flags TFSAs to take a closer look when totals climb past $250,000.

Reinvesting dividends is the secret sauce to compounding growth and reaching that amount. With a dividend-paying stock like Labrador Iron Ore Royalty (TSX:LIF) on the TSX, you can reinvest payouts to acquire more shares. This, in turn, generates even more dividends. It's a cycle that builds momentum over time.

More on LIF

Speaking of Labrador Iron Ore Royalty, let's explore why this stock is a compelling candidate for TFSA investors. Currently trading at $30.14, LIF boasts an impressive trailing annual dividend of $2.70 per share, which translates to a yield of 8.9%. This means for every $10,000 invested, you'd receive $890 annually in dividends alone.

LIF's financial performance and dividend history are worth noting. While the company has faced challenges recently due to fluctuating iron ore prices and lower demand for pellets, its royalty-based business model ensures consistent cash flows. For the third quarter of 2024, LIF reported royalty revenue of $41.5 million, down 12% year over year, and equity earnings from its stake in the Iron Ore Company of Canada (IOC) came in at $9.7 million. A significant drop from $23.1 million in the same quarter of 2023. Despite these headwinds, LIF has maintained its generous dividend payouts, supported by a payout ratio of 88.82%, ensuring investors continue to benefit.

Looking ahead, LIF's future remains optimistic. The company benefits from its substantial equity interest in IOC, which produces premium iron ore pellets and high-grade concentrate. Iron ore remains a critical component of global infrastructure, and as economies rebound and infrastructure spending increases, demand is expected to recover.

A TFSA's best friend

For TFSA investors, LIF represents more than just a solid dividend yield. It offers growth potential and a hedge against inflation. By combining its high dividend payouts with the tax-free environment of a TFSA, you can achieve compounded growth while shielding your earnings from taxes.

Now, let's address how to take your TFSA to the next level. The first step is to max out your annual contributions. For 2024 and 2025, the limit is $7,000, and every additional dollar invested early gives your money more time to grow. Next, focus on reinvesting all dividends earned. Many brokerages offer dividend-reinvestment plans, which automatically reinvest dividends into additional shares, allowing you to bypass trading fees and stay fully invested.

For investors with a long-term horizon, diversification is key. While LIF's dividend yield is a strong draw, consider pairing it with ETFs or other stocks that offer growth potential or exposure to different sectors. This strategy ensures your TFSA isn't overly reliant on one stock or sector, further safeguarding your portfolio from market volatility.