Young Canadians are increasingly responsible for setting cash aside for their retirement.
One way to do this is to buy dividend stocks inside an RRSP account and reinvest the distributions in new shares. By harnessing the power of compounding, millennials can potentially turn a modest initial investment into a serious pile of cash to finance their golden years.
Which stocks should you buy?
The best companies tend to hold leadership positions in their industries and have strong track records of dividend growth.
Enbridge is an attractive stock because the company’s assets essentially operate as tollbooths.
Enbridge owns pipeline that transport oil, natural gas, and natural gas liquids from producers to the end users. The company has long-term secured contracts with its customers and only builds new infrastructure when agreements are in place to guarantee the financial viability of the project.
The oil rout has some analysts concerned that demand will dry up for new infrastructure. That may be the case in the near term, but Enbridge has the power to grow through acquisitions.
In fact, the company just announced an agreement to buy Spectra Energy for $37 billion. The deal will add about 34,000 km of new natural gas and crude oil pipelines and boost the development portfolio to more than $70 billion.
The near-term projects alone are worth $26 billion, which means revenue and cash flow should rise at a healthy clip in the coming years as the new assets go into service. Enbridge now says it expects to raise its dividend by at least 10% per year through 2024.
The current payout already provides a yield of 3.6%, so investors are looking at some nice returns.
Long-term shareholders of this stock have done quite well. A $10,000 investment in Enbridge 15 years ago would be worth $107,000 today with the dividends reinvested.
TD is a banking giant with a diversified revenue stream coming from both Canada and the United States.
Most of the bank’s focus is on the retail segment of the industry, which tends to be more stable when the financial markets hit a speed bump. As a result, TD is widely considered to be the safest bet among the big Canadian banks.
The company has invested nearly $17 billion over the past decade to build a large presence in the United States. Today, TD actually has more branches south of the border than it does here in Canada.
The U.S. operations generated a year-over-year net income gain of 14% in fiscal Q3 2016. That helped the company post a 6% adjusted gain in overall earnings, despite a slight drop in profits on the Canadian side of the business.
TD has a paid a dividend every year since 1857. The current distribution offers a yield of 3.9%.
What about returns?
A $10,000 investment in TD just 15 years ago would be worth $52,000 today with the dividends reinvested.
Is one a better pick?
Both stocks are attractive buy-and-hold investments for an RRSP account.
I would go with Enbridge as the first choice today given the strong outlook for dividend growth in the medium term.
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Fool contributor Andrew Walker has no position in any stocks mentioned. The Motley Fool owns shares of Spectra Energy. Spectra Energy is a recommendation of Stock Advisor Canada.