Millennials have a huge opportunity that no Canadian generation has ever seen. The big question is, will they seize it?
A free ride in retirement
The secret to building a large nest egg for retirement lies in the ability to buy reliable dividend-growth stocks and reinvest the distributions over a long period of time. It’s a strategy that can be used by investors of all ages, but savers under the age of 40 are the ones who have the best chance to build up massive sums.
This has always been the case, but most people who invested this way in the past had to hold the investments in taxable accounts. They paid taxes on the dividends all along the way and continue to do so on the big capital gains as they liquidate the positions.
With the TFSA limits now at $10,000 per year, young people can build up significant retirement portfolios and never have to pay a dime in taxes on the dividends or the capital appreciation.
That’s an incredible opportunity that shouldn’t be passed up.
Taking advantage of this opportunity requires having the savings to invest and that necessitates prudent financial management. It’s a tough go these days, no doubt, but with a bit of planning people can set aside enough cash to make this work.
So, let’s get to the fun part.
TFSAs, dividend stocks, and the power of the DRIP
By setting aside just $100 per week for their TFSAs, young investors can quickly begin to buy shares in quality dividend-growth stocks like Royal Bank of Canada (TSX:RY)(NYSE:RY) and Fortis Inc. (TSX:FTS), and then use the dividend reinvestment plans (DRIPs) to buy more shares.
The process requires patience, the discipline to invest on a regular basis, and the ability to resist the urge to sell when the market takes a nosedive. After that, it’s just a matter of standing back for the next three decades and watching the power of compounding build a mountain of retirement money.
A strong past performance is no guarantee of an equal future performance, but picking companies with decades of solid gains is usually a safe bet, and analyzing them offers a chance to see what kind of returns can be generated.
For example, a single, one-time $10,000 investment in Royal Bank of Canada 20 years ago would now be worth $188,000 with the dividends reinvested. The same investment in Fortis Inc. would be worth $100,000. Those returns are pretty impressive and they might not be repeated in the next 20 years, but you will still do well with even modest returns.
For example, if you invest your saved $5,200 at the beginning of each year for 30 years and you get a total return of just 6% per year, you still end up with more than $435,000 in tax-free savings.
That’s not too shabby.
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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.