Written by Puja Tayal at The Motley Fool Canada
Your Tax-Free Savings Account (TFSA) has a limit of $6,500 contribution in 2023. And probably this limit will continue for a long term. Is it possible to become a millionaire by investing $6,500 every year? If you harness the power of compounding and reinvest your investment income, you can convert an annual investment of $6,500 into $1 million in 19 years. As they say, instead of timing the market, spend time in the market.
On the journey to a million-dollar retirement
It doesn’t take a genius to become rich through investing. It takes perseverance. See the simple math in the table below.
Investment Return @ 20%
You start with $6,500 this year and invest another $6,500 next year. With only four months left in 2023 and a muted growth in the remainder of the year, I calculated 20% average returns from 2024. If your $13,000 investment ($6,500 x 2) generates a 20% return, you will earn $1,300 tax-free investment income in TFSA. Instead of withdrawing the returns, if you invest them in stocks and replicate a 20% return, you can reach the $1 million goal by 2041.
Two stocks to build a million-dollar retirement fund
Two decades is a long time, but so is the retirement. No stock can generate 20% guaranteed returns every year. There are ups and downs, but the long-term compounded average comes to 20% returns.
If you are 20 years away from retirement, you can invest in the following growth stocks that have the potential to generate 20% compounded average returns in the next five to seven years.
Descartes Systems (TSX:DSG) has a track record of giving a 22% compound annual growth rate (CAGR) return in the last five years, which has been a roller-coaster ride for the company. The year 2018 saw the U.S.-China trade war, followed by Brexit, then pandemic-induced e-commerce boom, the return of air travel and supply chain disruption due to the Russia-Ukraine war. At every level, the demand for Descartes’s supply chain solutions increased.
In these five years, Descartes’s net margins improved from 11% to 21%. It is just the beginning. As world trade becomes more efficient and e-commerce volumes pick up, Descartes could benefit from its logistics solutions offerings like last-mile delivery.
Now is a good time to buy the stock as it trades below $100 due to market weakness. Trade and e-commerce volumes could pick up during the holiday season, driving Descartes’s stock price. But if a recession is imminent, then Descartes’s stock could fall. If it falls further, you could buy more as this stock will likely recover in a strong economy.
Nuvei (TSX:NVEI) is another e-commerce stock. This stock fell 47% in early August after it reported lesser-than-expected earnings and reduced its 2023 outlook. The company lowered its outlook, as it cut ties with a large customer, and new business from Paya is taking longer to pick up momentum.
Amid this weakness, Nuvei showed confidence in its business by announcing its first-ever cash dividend of $0.10 per share. While the stock lost almost 50% value, I am still bullish, as it has strong fundamentals. The company is focusing on repaying debt and returning excess capital to shareholders.
Now is a good time to buy the stock while it trades at its all-time low. Value stocks are found at difficult times. While the stock price might remain weak for a few months, it could grow severalfold when the economy recovers.
The two stocks have the potential to generate multiple-fold growth in the next five to seven years, as they cater to future business needs. They can give your retirement portfolio a boost and help you retire a millionaire.
Before you consider Descartes Systems Group, you'll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in August 2023... and Descartes Systems Group wasn't on the list.
The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 26 percentage points. And right now, they think there are 5 stocks that are better buys.
See the 5 Stocks * Returns as of 8/16/23
The Motley Fool has positions in and recommends Nuvei. The Motley Fool recommends Descartes Systems Group. Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.