Millennials are faced with a number of financial challenges.
Housing is expensive, companies don’t want to hire new grads, and most of the jobs that are available no longer come with generous pension plans.
This leaves young Canadians with limited options to build a cash stash for retirement, but they do have one attractive savings vehicle that was never available to their parents at the same age.
It’s called the Tax-Free Savings Account (TFSA).
Why is the TFSA good for young investors?
Canadians in the early part of their careers are likely in a lower tax bracket than they will be in a decade or two. As a result, there is a line of thinking that suggests it would be best to invest in a TFSA today and bank the RRSP contribution room until you are in a higher marginal tax bracket.
In addition, any income or capital gains earned inside a TFSA are tax-free, and in the event of a real emergency, the money is easier to access.
How to maximize returns
The secret of the TFSA lies in the ability to buy dividend stocks and reinvest the full value of the distributions in new shares. This sets off a powerful compounding process that can turn a modest initial investment into a serious pile of money over time.
The best companies to own have strong track records of dividend growth. Let’s take a look at Fortis Inc. (TSX:FTS)(NYSE:FTS) to see why it might be attractive.
Fortis owns natural gas distribution, power generation, and electric transmission assets in Canada, the United States, and the Caribbean.
Dividend investors like the company because it gets about 96% of its revenue from regulated assets, which means cash flow should be both reliable and predictable.
Management has done a good job of expanding the company through strategic acquisitions and organic development projects with major investments in recent years focused on the United States.
Fortis plans to raise the dividend by at least 6% per year through 2021. The company has increased the payout every year for more than four decades, so investors should feel comfortable with the guidance.
What about returns?
A single $10,000 investment in Fortis 20 years ago would be worth more than $200,000 today with the dividends reinvested.
The bottom line
Past performance is no guarantee of future returns in any stock, but the strategy of buying top-quality dividend-growth companies and reinvesting the distributions is a proven winner over time.
The great thing about using the TFSA is that all the gains go straight into your pocket when the time comes to cash out.
