The tax-free savings account (TFSA) has given investors a great opportunity to embrace the power of compounding and build a substantial retirement portfolio.
Many investors hold fixed income securities in their TFSAs because interest income is taxed heavily when held in a non-registered account. That certainly makes sense, but the TFSA also lets investors reinvest dividends tax free and keep all the capital gains when it comes time to remove the funds.
That’s an opportunity that investors should embrace because capital appreciation can be significant when you look at decades of growth.
Here are the reasons why I think Royal Bank of Canada (TSX:RY)(NYSE:RY) and Fortis Inc. (TSX:FTS) are solids picks to get started.
Royal Bank
The Canadian banks have been under a bit of pressure this year as investors fret about the possibility of an extended recession.
Economic weakness is certainly a concern and the commodity rout’s full impact on jobs and housing prices is yet to be seen, but Royal Bank is well prepared to ride out a downturn. In fact, the results suggest things are still rolling along quite well.
Net income for the last quarter came in at $2.474 billion, 4% higher than the same period last year. Royal Bank gets its revenue from a variety of business segments and is well diversified outside of Canada, which helps offset any weakness in the domestic economy.
The U.S. is probably the most promising area of growth for the bank, and management is taking steps to expand its presence in the American market. For example, Royal Bank is in the process of closing its US$5.4 billion acquisition of California-based City National, a large wealth management company.
About 19% of Royal Bank’s earnings already come from the U.S. operations, and the number should increase in the coming years.
The bank pays a quarterly dividend of $0.79 per share that yields 4.3%.
A $10,000 investment in Royal Bank 15 years ago would now be worth about $50,000 with the dividends reinvested.
Fortis
Fortis owns and operates electricity generation and natural gas distribution assets in the U.S., Canada, and the Caribbean.
The company gets 93% of its revenue from regulated assets, which means cash flow and earnings are predictable and reliable.
Management does a good job of looking for opportunities to enhance returns and grow the business. Last year the company spent $4 billion to buy Arizona-based UNS Energy. The deal is already accretive to earnings and expands the company’s strong presence in the United States.
Fortis pays a quarterly dividend of $0.375 per share that yields about 3.9%.
A $10,000 investment in Fortis 15 years ago with the dividends reinvested would be worth about $69,000 today.
