Millennials are searching for creative ways to set aside cash for a comfortable retirement.
One option is to buy dividend-growth stocks inside a Tax-Free Savings Account (TFSA) and reinvest the distributions in new shares.
This sets off a powerful compounding process that can turn a modest initial investment into a substantial nest egg over time.
The great thing about the TFSA is that the full value of the dividends is available to reinvest, and all the capital gains are protected from the tax man when the time comes to cash out the portfolio.
CN is literally the backbone of the U.S. and Canadian economies with an extensive rail network that touches three coasts.
The strategic advantage of the company’s reach should not be underestimated, as it provides a significant moat. The odds of new rail lines being built along the same routes are pretty slim, and merger attempts in the rail sector tend to run into significant roadblocks.
In fact, the rail industry attracts legendary investors such as Warrant Buffett and Bill Gates because it has such huge barriers to entry. Gates is actually CN’s largest shareholder.
CN still has to compete with trucking companies and other railways on some routes, so management works hard to ensure the company is very competitive. CN regularly reports an industry-leading operating ratio and is widely viewed as the best-run company in the sector.
The company generates substantial free cash flow and does a good job of returning it to investors through dividend increases and share buybacks.
CN’s dividend only yields 1.6%, but the compound annual dividend-growth rate over the past decade is better than 16%.
Fortis owns electric transmission, power generation, and natural gas distribution assets in Canada, the United States, and the Caribbean.
The company has grown over the years through a combination of organic projects and strategic acquisitions, and the trend continues.
The latest deal was the purchase of a two-thirds interest in the Waneta dam in British Columbia.
Fortis gets most of its revenue from regulated assets, which means cash flow should be predictable and reliable. This is great for investors who are looking for quality dividend stocks.
Fortis plans to raise its 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.
The distribution currently provides a yield of 3.5%.
Is one a better bet?
Both companies should be strong buy-and-hold picks for a TFSA portfolio. I would probably split a new investment between the two names.
The Motley Fool Canada’s top dividend expert and lead adviser of Dividend Investor Canada, Bryan White, recently released a premium “buy report” on a dividend giant he thinks everyone should own. Not only that – but he’s created a must-have, exclusive report that outlines all the alarming traits of dividend stocks that are about to blow up – and how you can avoid them.
For this limited time only, we’re not only taking 57% off Dividend Investor Canada, but we’re offering you special access to two brand-new reports, free of charge upon signing up. They will outline everything you need to know so you steer clear of dividend burn-outs AND take advantage of the dividend giants in the Canadian market.
While this offer is still available, you can find out how to get a copy of these brand-new reports by simply clicking here.
Fool contributor Andrew Walker has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.