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Canadians use their Tax-Free Savings Accounts (TFSA) to achieve a variety of savings goals.
Some put cash aside to buy a house. Others use the vehicle as a savings account for a new car, a holiday, or even a wedding. These short-term objectives usually see the funds put into GICs.
That makes sense if you need the cash in the near term, but the most effective use of the TFSA might be as a retirement-planning fund.
Why?
The TFSA allows investors to collect dividends without having to set aside any of the gains for the taxman.
This means pensioners can put the full value of distributions right in their pockets, and younger investors have the ability to reinvest the dividends in new shares, triggering a powerful compounding effect.
In fact, a modest initial investment can turn into a large retirement stash over the course of a few decades.
Now that the TFSA has been around for a while, the amount of money a person can invest in the vehicle has grown enough to make it attractive for those with larger sums at their disposal.
How large?
Any Canadian resident who was at least 18 years old in 2009 has up to $52,000 in available TFSA contribution room.
Let’s take a look at Fortis Inc. (TSX:FTS)(NYSE:FTS) to see why it might be an interesting pick.
Growth
Fortis has a history of expanding its business through organic developments and strategic acquisitions.
In recent years, much of the focus has been on the United States, including the 2014 acquisition of Arizona-based UNS Energy for US$4.5 billion and last year’s US$11.3 billion purchase of Michigan-based ITC Holdings.
Increased earnings from UNS and accretion from ITC are expected to drive strong results in 2017.
Fortis also just announced a deal to acquire a two-thirds interest in the Waneta Dam in British Columbia for $1.2 billion.
Dividends
Fortis says it expects cash flow to increase enough to support annual dividend growth of at least 6% through 2021.
The company has raised its payout every year for more than four decades, so investors should feel comfortable with the guidance.
The current payout provides a yield of 3.6%.
What about returns?
A $10,000 investment in Fortis 20 years ago would be worth about $187,000 today with the dividends reinvested.
Should you buy?
Past performance is no guarantee of future returns, but the strategy of buying reliable dividend-growth stocks and reinvesting the distributions is a proven one.
In the case of Fortis, the track record is impressive, and the company should continue to be an attractive pick for investors searching for a reliable dividend-growth name to add to their TFSA portfolios.
