MENU

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

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.

Looking for a few more great dividend-paying stocks to buy today?

If so, you're in luck! Because we just tapped one of our top analysts -- and experts in this field -- and asked him to put together a special report highlighting three of his favorite dividend-payers to buy right now.

These three "Cash Kings" have an average yield of 4.0%... are poised to profit from three diverse (and highly crucial) sectors of the economy... and look like they have the ability to grow their dividend well into the future.

For a limited time you can get a copy of this brand new special report by simply clicking here.

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

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.