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Millennials: Avoid This Insidious Mistake With Your TFSA

Joey Frenette
Piggy bank next to a financial report

Far too many millennials aren’t using their TFSAs to grow their wealth, and that’s a massive problem. The TFSA is an invaluable tool that can grow one’s wealth to remarkable heights, but many young investors are merely using the account to store cash, which essentially negates the TFSA’s tax-free advantage.

Sure, a “high-interest” tax-free savings account may seem like a safe way to grow one’s wealth over time, but as I mentioned in a prior piece, it’s actually one of the biggest mistakes that a Canadian could make with the proceeds within their TFSAs.

Sure, the “high” interest that’s collected from such savings accounts is guaranteed, but so too is the fact that investors will come up short on the growth front and likely lose ground to the insidious effects of inflation over time.

Gone are the days where you could get a high return without taking on some form of risk. In this low (and possibly falling) interest rate environment, investors have to settle for sub-2% returns in a TFSA, depending on a bank’s net interest margins (NIMs) at a given point in time.

While you would save a fraction of a percent in taxes by using a “high”-interest TFSA, you could be saving so much more with higher-return investments like equities or REITs. While you would be taking on some form of risk by investing in such assets, the magnitude of risk will go down the longer your investment horizon is. The reverse is true for “lower-risk” investments like bonds.

If you’re like many millennials who’ve been scarred by the aftermath of the dot-com crash and the 2007-08 Financial Crisis, it can be tough to justify putting your hard-earned money to work in “risky” assets. But given that you’re likely decades away from your expected retirement date, it’s actually in your best interest (pun intended) to take a pass on interest from savings accounts for quality stocks.

For those risk-averse millennials, it can be tough to get back into the investment waters after you lost your shirt during the last recession. Fortunately, there are defensive dividend stocks that make it easier to get back in the investment game.

Consider Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN), a low-risk renewable energy and regulated utility company. Algonquin sports a generous 4.2%-yielding dividend alongside an above-average dividend-growth profile thanks to its promising pipeline of sustainable projects.

Renewable energy companies like Algonquin are riding on a powerful secular uptrend that’ll likely last for decades. With new renewable projects slated to support future dividend hikes, Algonquin is a gift that’ll keep on giving and is a perfect forever holding for any TFSA. The growing dividend payments and capital gains will be off-limits for the taxman, making it an ideal holding for young investors who want to grow their wealth without risking their pocketbooks.

In addition to above-average growth, Algonquin’s regulated utility businesses provide a stable foundation that can keep the ship steady when the economic waters become rough. The lower dependence to the state of the economy means Algonquin stock sports a low 0.4 beta and is perfect for those who are rattled by excessive amounts of volatility.

With a wealth of water assets, Algonquin is the epitome of stability and will blow cash or cash equivalents out of the water over the long term. In a decade or more from now, you’ll thank yourself for investing in such companies rather than settling for those “high” interest rates.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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