Young Canadians have an opportunity to grow their investments in a way that was never available to previous generations.
Before 2009, investors didn’t have an easy way to protect dividends and capital gains from the government. That changed with the introduction of the tax-free savings account (TFSA) and millennials are the ones who can benefit the most.
By using the TFSA to buy stocks, investors are able to reinvest the full value of their dividends in new shares and launch a compounding effect that can build substantial wealth a little bit at a time.
The results can be significant over the course of two or three decades, and today’s young investors could possibly find themselves sitting on massive retirement nest eggs with relatively little money in initial investments.
How does it work?
The trick is to purchase reliable dividend-growth stocks that have long track records of rewarding investors with consistent distributions and higher share prices.
Young savers have an advantage over their parents or grandparents in that they can comfortably ride out periods of weakness in stock prices. In fact, market pullbacks work to their advantage because the dividends buy even more shares.
To get the most out of the system, investors have to be consistent with their investments and patient enough to leave the money alone until they retire.
How much can you invest?
Any investor who was 18 years old in 2009 has the full amount available. In other words, if you turn 24 or older in 2015, you have a maximum $41,000 in contribution room available to put into your TFSA.
The 2015 limit is $10,000. The limit for both 2013 and 2014 was $5,500. From 2009 to 2012 the limit was $5,000 per year.
Which stocks should you buy?
Many Canadian companies have made long-term investors quite rich. Past performance does not guarantee the same success in the future, but it is a pretty good guide when starting the search for top candidates.
Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Fortis Inc. (TSX:FTS) are two examples worth considering.
TD
TD is one of Canada’s best-run companies, and it operates in an environment with little competition. The bank is primarily focused on the low-risk retail segment of the industry, and has large operations in both Canada and the United States.
A single $10,000 investment in TD 20 years ago would be worth about $150,000 today with the dividends reinvested.
Fortis
Fortis is an electricity generation and natural gas distribution company with assets in Canada, the Caribbean, and the United States. The company gets 93% of its revenue from regulated assets, which means cash flow and earnings are quite predictable.
A one-time investment of $10,000 in Fortis 20 years ago would be worth about $109,000 today with the dividends reinvested.
As you can see, it doesn’t take much money, but investors need discipline to let the investment to grow. When it comes time to use the funds, all the gains are yours to keep, and that’s the best part of the TFSA.
