Canadians can build a substantial pile of savings in their TFSAs by following a very simple, but proven, investing strategy. What is it? Buy top-quality dividend-growth stocks and reinvest the dividends in new shares. The strategy harnesses the power of compounding and can turn a modest initial investment into an impressive savings fund over time. Which companies should you own? The best companies to buy have long track records of dividend growth. It also helps if they operate in sectors or areas with limited competition. Let’s take a look at Fortis Inc. (TSX:FTS)(NYSE:FTS) and Bank of Montreal (TSX:BMO)(NYSE:BMO) to see…
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Canadians can build a substantial pile of savings in their TFSAs by following a very simple, but proven, investing strategy.
What is it?
Buy top-quality dividend-growth stocks and reinvest the dividends in new shares. The strategy harnesses the power of compounding and can turn a modest initial investment into an impressive savings fund over time.
Which companies should you own?
The best companies to buy have long track records of dividend growth. It also helps if they operate in sectors or areas with limited competition.
Fortis owns natural gas distribution, electricity generation, and power transmission assets in Canada, the United States, and the Caribbean.
The company has made significant investments in the United States in recent years, including the 2016 takeover of ITC Holdings Corp. for US$11.3 billion. Fortis is still based in eastern Canada, but the company now has 60% of its assets located in the United States.
The appeal of Fortis is that once the assets are in place, they pretty much have a monopoly on the distribution to the customers. Think about it, what are the odds of a different company running a second gas line to your house?
Fortis gets more than 90% of its revenue from regulated businesses, making the cash flow very reliable. That’s good news for the company’s investors, who have received an increase in the payout every year for more than four decades.
Fortis currently offers a yield of 3.9%.
What about returns?
A $10,000 investment in Fortis 20 years ago would be worth $176,000 today with the dividends reinvested.
Bank of Montreal
Investors often skip Bank of Montreal when looking for a financial stock to put in their portfolios, but that might begin to change.
Bank of Montreal’s revenue stream is nicely balanced by segment and geography, which is important in the current economic climate.
As with its peers, the company relies heavily on its Canadian personal and commercial banking operations, but Bank of Montreal also has strong wealth management and capital markets groups that contribute to the mix.
In addition, the bank operates about 500 branches in the United States with the commercial group being particularly strong, especially after the addition of GE Capital’s transport finance business in late 2015.
The U.S. division provides a nice hedge against weak times in Canada and should continue to deliver strong results.
Bank of Montreal has paid a dividend every year since 1829. The current distribution yields 3.5%.
The Canadian banks operate in a cozy market with limited competition. Disruption is going to occur from new technology, but the Big Five are investing heavily to stay relevant and have the means to compete with any challenges they face.
A $10,000 investment in Bank of Montreal 20 years ago would be worth $98,000 today with the dividends reinvested.
Is one more attractive right now?
Both stocks are solid picks for buy-and-hold investors.
Having said that, Bank of Montreal has rallied more than 35% in the past year, so the stock is probably fully valued at the moment. As such, I would make Fortis the first choice today.
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Fool contributor Andrew Walker has no position in any stocks mentioned.