Young investors might be looking at the recent stock market correction and wondering if owning stocks is a good idea.
For people who need access to their savings in the near term, the best option is to put the money in GICs or other short-term products, but investors with a multi-decade savings horizon should see the latest pullback as a fantastic opportunity to start building a mountain of money for retirement using dividend-growth stocks.
Here are the reasons why I think Royal Bank of Canada (TSX:RY)(NYSE:RY) and Fortis Inc. (TSX:FTS) are great picks to get started.
Royal Bank
Royal Bank’s shares have pulled back on concerns that the oil crisis in Alberta will spread economic hardship across the country and trigger a meltdown in the housing market.
Difficult days are certainly upon us, and the bank is already seeing some increases in oil-related credit losses, but the doomsday scenario is unlikely to pan out, and investors have to keep the big picture in mind during these times of volatility.
To put things in perspective you just have to look at Royal Bank’s results.
The company reported $10 billion in profits in 2015! That’s an insane amount of money considering the economic conditions are supposed to be “challenging.”
Why is the company doing so well?
The success can be attributed to the fact that Royal Bank has a very diversified revenue stream. The bank gets 52% of its earnings from the personal and commercial banking segment, 24% from its capital markets group, 11% from its wealth management operations, 7% from the insurance business, and 6% from its investor and treasury services division.
A weak quarter in one group is often offset by a strong performance in another.
Royal bank is also investing for future growth. The company recently closed its US$5 billion acquisition of California-based City National Corp., a private and commercial bank that caters to high-net-worth clients. With the U.S. dollar now above CAD$1.45 and the Fed beginning to raise interest rates, earnings from the new acquisition should be decent in the coming years.
Royal Bank raised its dividend by 8% in 2015, so management can’t be overly concerned about the earnings outlook. The current distribution yields 4.8%.
A $10,000 investment in Royal Bank 20 years ago would now be worth about $140,000 with the dividends reinvested.
Fortis
Fortis operates electricity generation and natural gas distribution assets in Canada, the United States, and the Caribbean.
Young investors tend to look for more exciting companies for their investments, but boring and reliable is a good place to be, especially when you are trying to build savings for retirement.
Fortis gets 96% of its revenue from regulated assets. This means cash flow and earnings are reasonably predictable, and that tends to be good for the sustainability of the dividend. In fact, Fortis has increased its payout every year for more than four decades.
Fortis recently raised its dividend by 10% and now offers a payout that yields 4.1%.
A $10,000 investment in Fortis 20 years ago would now be worth about $101,000 if the dividends were reinvested.
