Canadian investors are searching for top-quality dividend-growth stocks to put inside their Tax-Free Savings Account (TFSA) portfolios.
The strategy is a wise one, especially when the distributions are invested in new shares.
Why?
This sets off a powerful compounding process that can turn a modest initial investment into a substantial nest egg over time.
The TFSA allows investors to use the full value of the dividends to buy new shares without having to set some aside for the taxman, and when the time comes to cash out, any capital gains are tax-free.
Let’s take a look at Fortis Inc. (TSX:FTS)(NYSE:FTS) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) to see why they might be interesting picks.
Fortis
Fortis owns natural gas distribution, electric transmission, and power-generation assets in Canada, the United States, and the Caribbean.
Most of the growth in the past few years has come through strategic acquisitions, including the 2014 purchase of Arizona-based UNS Energy for US$4.5 billion, last year’s US$11.3 billion takeover of Michigan-based ITC Holdings, and the recent deal to acquire a two-thirds interest in the Waneta Dam in British Columbia.
Fortis says the additional cash flow should support annual dividend growth of at least 6% per year through 2021.
The company has raised its dividend every year for more than four decades, so investors should feel comfortable with the guidance.
The current distribution provides a yield of 3.5%.
TD
TD is widely viewed as the safest pick among the Big Five Canadian banks.
Why?
The company gets the majority of its revenue and profits from bread-and-butter retail banking activities, which are considered to be less volatile than capital markets operations.
TD also has the lowest direct exposure to the energy sector.
In addition, investors take comfort in TD’s large U.S. business, which has grown to the point where the bank has more branches south of the border than it does in Canada.
This provides a nice hedge against an economic downturn that could be on the way in the domestic market.
Some investors are concerned the banks are going to be hit by a pullback in the Canadian housing market. TD definitely has heavy exposure, but 47% of the portfolio is insured, and the loan-to-value ratio on the rest is 49%.
That means house prices would have to drop significantly before the bank takes a material hit.
TD has delivered annualized dividend growth of 11% over the past 20 years. The current payout provides a yield of 3.7%.
Is one a better bet?
Both stocks should be solid buy-and-hold picks for a TFSA portfolio. At this point, I would call it a draw between the two names.
