Canadians are searching for ways to set aside some additional cash for their retirement years.
One popular strategy involves holding dividend stocks inside a Tax-Free Savings Account (TFSA) and investing the distributions in new shares. The TFSA protects all earnings and gains from the tax authorities, allowing the full value of the payouts to be used to purchase additional stock.
When the time comes to cash out and enjoy the money, any capital gains triggered on the positions are yours to keep.
Let’s take a look at Fortis Inc. (TSX:FTS)(NYSE:FTS) and Canadian National Railway Company (TSX:CNR)(NYSE:CNI) to see why they might be interesting picks.
Fortis
Fortis own natural gas distribution, electric transmission, and power-generation businesses in Canada, the United States, and the Caribbean.
The company has grown over the years through a mix of organic developments and strategic acquisitions.
Recent additions to the portfolio include the 2014 purchase of Arizona-based UNS Energy for US$4.5 billion and last year’s $11.3 billion takeover of Michigan-based ITC Holdings.
Investors initially took a step back when the ITC deal was announced, thinking Fortis might be taking on more than it could handle, but the integration has gone well, and the assets are performing as expected.
As a result of the additional cash flow, Fortis plans to raise its dividend by at least 6% per year through 2021.
Management has increased the payout every year for more than four decades, so investors should feel comfortable with the guidance.
Fortis currently provides an annualized dividend yield of 3.5%.
CN
CN is literally the backbone of the Canadian and U.S. economies and is the only rail operator with a rail network that touches three coasts.
The competitive advantage the company enjoys is likely to remain in place for quite some time, as attempts to merge railways tend to run into regulatory issues, and the odds of new tracks being built along the same routes are pretty low.
CN still competes with trucking companies and other railways on some routes, so management works hard to make sure the business is running efficiently.
They do a good job. In fact, CN is widely viewed as the top company in the industry and often reports a sector-leading operating ratio.
The company generates significant free cash flow to support dividend growth that has averaged about 16% over the past 20 years. Investors have also benefitted from aggressive share-repurchase programs.
If you want a stock to simply buy and tuck away in your portfolio for two or three decades, CN deserves to be on your radar.
The bottom line
Owning top dividend stocks and investing the distributions in new shares is a proven strategy for building a savings portfolio over time.
The TFSA provides Canadian investors with an opportunity to get the most out of their invested funds.
