Canadians are using the TFSA account to set aside funds for retirement.
One of the best ways to leverage the advantages of the vehicle is to buy dividend-growth stocks and invest the distributions in new shares. This sets off a powerful compounding process that could turn a modest initial investment into a very large nest egg.
Which stocks should you buy?
The most attractive companies tend to be market leaders with strong track records of dividend growth.
Let’s take a look at Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Fortis Inc. (TSX:FTS) to see why they are strong candidates.
TD
TD holds an anchor position in many Canadian portfolios, and for good reason.
The company continues to generate solid results amid a challenging environment. Fiscal third-quarter adjusted earnings rose 6% compared with Q3 2015 with the best performance coming from the company’s U.S. operations, which generated a 14% year-over-year net income gain.
TD has built a formidable business south of the border over the past decade. In fact, the company now has more branches in the U.S. than it does here in Canada. This diversification in the revenue stream is important for investors who are concerned the Canadian economy is in for a rough ride in the next few years.
TD raised its dividend by 8% earlier this year, so management remains bullish on its ability to generate higher earnings. The current distribution yields 3.8%.
A $10,000 investment in TD just 15 years ago would be worth $53,000 today with the dividends reinvested.
Fortis
Fortis is a natural gas distribution and electricity generation company with assets located in the United States, Canada, and the Caribbean.
Management has done a good job over the years of growing the company through a combination of organic development and strategic acquisitions.
In 2014, Fortis spent US$4.5 billion to buy Arizona-based UNS Energy. The integration of the assets went well and the additional revenue supported a 10% increase in the dividend last fall.
Fortis completed an expansion at its Waneta hydroelectric project in British Columbia last year, and that asset is already providing a nice boost to cash flow in 2016.
Now Fortis is spending US$11.3 billion to buy ITC Holdings Corp., the largest independent transmission company in the United States.
Fortis gets 94% of its revenue from regulated assets, so cash flow should be both reliable and predictable. This is great for dividend investors and a big reason why the company is one of Canada’s top dividend-growth stocks.
Fortis has raised its payout every year for more than four decades. The current distribution offers a yield of 3.6%.
A $10,000 investment in Fortis 15 years ago would be worth $87,000 today with the dividends reinvested.
Is one a better bet?
Both stocks are strong long-term holdings for any TFSA account. Annual dividend growth should be 6-8% for each company in the medium term, so I would consider it a coin toss between the two today.
