Young investors have a great investing opportunity that was never available to their parents. It’s called the Tax Free Savings Account (TFSA).
What’s the scoop?
The secret to building a large retirement nest egg lies in the ability to leverage the power of compounding.
This has always been the case, but the introduction of the TFSA means Canadians can now buy dividend stocks in their tax-free account and reinvest the full value of the distributions in new shares.
Over time, the portfolio has the ability to slowly grow from a modest initial investment to a significant sum.
The best part?
When you reach retirement you can begin to spend the distributions or even sell the shares, and all of the income and capital gains go straight into your pocket!
That’s a huge advantage over older investors who have paid taxes on the distributions all along the way and now have to give the government a cut of the gains when they sell the stocks held in taxable accounts.
Which stocks should you buy?
The best companies have long track records of dividend growth. They also tend to be leaders in industries with huge barriers to entry.
Let’s take a look at Fortis Inc. (TSX:FTS) to see why it might be a solid pick.
Fortis is a natural gas distribution and electricity generation company with assets located in Canada, the United States, and the Caribbean.
The business has grown over the years through a mix of organic projects and strategic acquisitions, and that trend continues today.
Last year Fortis completed work on an expansion at its Waneta hydroelectric facility in British Columbia. The company also generated its first full year of revenue from the 2014 acquisition of Arizona-based UNS Energy.
The additional revenue helped support a 10% increase in the dividend.
Now, Fortis is spending US$11.3 billion to buy ITC Holdings Corp., a regulated transmission company in the United States. The purchase is expected to close later this year and be accretive in 2017.
Fortis gets most of its revenue from regulated utilities, which are attractive for dividend investors because cash flow tends to be predictable and reliable. And once the assets are in place, competing infrastructure is unlikely to be built to serve the same customer base.
Fortis has raised its dividend every year for more than four decades.
A single $10,000 investment in Fortis just 20 years ago would be worth $200,000 today with the dividends reinvested.
There’s no guarantee the next 20 years will deliver the same results. They might be better, or they could be worse, but the odds are pretty good that investors will do well over the long haul.