Canadians of all ages are wondering if their retirement savings will be sufficient to enable a comfortable existence in their golden years, but the group with the largest concerns could be millennials.
Why?
Unlike their parents or grandparents, most millennials are not going to have access to a defined pension plan to cover their retirement expenses, and using the house as a vehicle for building equity is going to be a challenge.
This means young savers will have to rely on investments to supplement their Canada Pension Plan (CPP) and Old Age Security (OAS) payments.
In the past, GICs and bonds paid enough interest that most people didn’t have to venture into stocks, but interest rates have fallen so much that equities are pretty much the only game in town.
Fortunately, millennials can take advantage of one opportunity that was never available to older savers. It’s called the TFSA.
How does it work?
Young investors can use their TFSA to purchase dividend-growth stocks and reinvest the dividends to buy more shares. Any earnings in the TFSA are tax free, so the full value of the dividends can be used to generate growth.
By harnessing the power of compounding, young savers can turn modest initial investments into substantial holdings over the course for two or three decades.
Which stocks should you buy?
The best companies have long track records of increasing their dividends on a regular basis. They also tend to hold strong positions in industries with few competitors and high barriers to entry.
Let’s take a look at Bank of Montreal (TSX:BMO)(NYSE:BMO) and Canadian National Railway Company (TSX:CNR)(NYSE:CNI) to see why they are good picks.
Bank of Montreal
Investors often overlook Bank of Montreal when deciding on a financial stock, but the bank probably deserves more respect.
The company has a diversified revenue stream with a growing U.S.-based business. As Canada works its way through a rough patch, the American operations provide investors with a nice hedge. In fact, the U.S. business contributed 18% of the company’s profits in the most recent quarterly report.
Bank of Montreal has paid investors a dividend every year since 1829, and the current distribution offers a yield of 4.25%.
A $10,000 investment in Bank of Montreal 20 years ago would now be worth $99,000 with the dividends reinvested.
CN
CN is one of Canada’s best wealth generators, and there is little reason to believe that will change.
The company owns the only rail network in North America that links three coasts, and the odds are pretty much nil that a competitor will ever build new tracks along the same routes.
When you throw in the fact that CN is also considered to be the best-run railway on the continent, you can see why investors like the stock.
The company recently increased the dividend by 20%, and shareholders have enjoyed an average 17% per year gain in the distribution over the past 20 years.
As the Canadian and U.S. economies expand and exports increase, CN is going to chug along for the ride.
A single $10,000 investment in CN in 1996 would now be worth $245,000 with the dividends reinvested.
