Young Investors: Why Own Dividend-Growth Stocks in Your TFSA?

Owning top dividend-growth stocks, such as Fortis Inc. (TSX:FTS)(NYSE:FTS), has proven to be a great way to build wealth over the long haul.

| More on:
The Motley Fool

Millennials are faced with a number of financial challenges.

Housing is expensive, companies don’t want to hire new grads, and most of the jobs that are available no longer come with generous pension plans.

This leaves young Canadians with limited options to build a cash stash for retirement, but they do have one attractive savings vehicle that was never available to their parents at the same age.

It’s called the Tax-Free Savings Account (TFSA).

Why is the TFSA good for young investors?

Canadians in the early part of their careers are likely in a lower tax bracket than they will be in a decade or two. As a result, there is a line of thinking that suggests it would be best to invest in a TFSA today and bank the RRSP contribution room until you are in a higher marginal tax bracket.

In addition, any income or capital gains earned inside a TFSA are tax-free, and in the event of a real emergency, the money is easier to access.

How to maximize returns

The secret of the TFSA lies in the ability to buy dividend stocks and reinvest the full value of the distributions in new shares. This sets off a powerful compounding process that can turn a modest initial investment into a serious pile of money over time.

The best companies to own have strong track records of dividend growth. Let’s take a look at Fortis Inc. (TSX:FTS)(NYSE:FTS) to see why it might be attractive.

Fortis owns natural gas distribution, power generation, and electric transmission assets in Canada, the United States, and the Caribbean.

Dividend investors like the company because it gets about 96% of its revenue from regulated assets, which means cash flow should be both reliable and predictable.

Management has done a good job of expanding the company through strategic acquisitions and organic development projects with major investments in recent years focused on the United States.

Fortis plans to raise the dividend by at least 6% per year through 2021. The company has increased the payout every year for more than four decades, so investors should feel comfortable with the guidance.

What about returns?

A single $10,000 investment in Fortis 20 years ago would be worth more than $200,000 today with the dividends reinvested.

The bottom line

Past performance is no guarantee of future returns in any stock, but the strategy of buying top-quality dividend-growth companies and reinvesting the distributions is a proven winner over time.

The great thing about using the TFSA is that all the gains go straight into your pocket when the time comes to cash out.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stocks mentioned.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »