Canadian investors love dividend stocks and the best place to hold them is in a TFSA.
Why?
The TFSA protects all income and gains from the taxman, so your full dividend can be reinvested to purchase new shares. This sets off a compounding process that could turn a small initial investment into a significant nest egg.
The best stocks tend to have long histories of dividend growth supported by rising revenues. Ideally, they also operate in industries with high barriers to entry.
Let’s take a look at Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Fortis Inc. (TSX:FTS) to see if one is a better TFSA pick right now.
TD
TD reported Q1 2016 earnings of $2.2 billion. That’s not bad for three months of work in challenging economic environment, and the results are an indication of the strength of TD’s award-winning retail business.
Customer service is top notch at TD’s branches. Employees are friendly, wait times are generally short, and the locations are open for extended hours and on weekends. Providing this level of service isn’t cheap, but TD knows it pays off, especially when every customer-facing employee is constantly on the lookout for opportunities to provide clients with additional products or services.
Most investors are familiar with the Canadian operations, but TD actually has more branches south of the border. The U.S. presence provides a nice balance to the revenue stream, and every dollar of profit in the American division currently converts to nearly CAD$1.30.
TD recently raised its dividend by 8% and investors should see regular growth continue. The current payout offers a yield of 4%.
A $10,000 investment in TD just 15 years ago would now be worth $50,000 with the dividends reinvested.
Fortis
Fortis is an electricity and natural gas utility with assets located in Canada, the United States, and the Caribbean.
The company has a long history of successful growth through acquisitions, and investors continue to benefit from that process.
Like TD, Fortis has expanded its U.S. presence to diversify its earnings. In 2014 the company purchased Arizona-based UNS Energy for US$4.5 billion in a deal that provided greater revenue balance in the company’s asset base by both location and regulatory jurisdiction. The integration went well, and the addition of the new assets helped drive 2015 net earnings to a record $2.61 per share.
This year, Fortis is swinging for the fence with its US$11.3 billion purchase of ITC Holdings Corp., the largest independent pure-play transmission company in the United States.
Fortis increased the dividend by 10% in late 2015 and management expects to boost the payout by 6% per year through 2020. Investors should feel confident in the guidance because Fortis has increased its dividend every year for the past four decades. The current distribution provides a yield of 3.75%.
The returns?
A $10,000 investment in Fortis 15 years ago would now be worth $91,000 with the dividends reinvested.
Which is a better pick?
Both companies are great long-term investments and belong in any TFSA portfolio. If you only have enough cash to buy one, I would give the edge to Fortis right now.
