Young Canadians are searching for ways to set aside adequate cash to fund a comfortable retirement.
One strategy involves holding quality dividend stocks inside a TFSA or RRSP and reinvesting the distributions in new shares. Over time, the power of compounding can work its magic, and investors could see modest initial contributions grow to be significant savings.
All Canadians can benefit from the compounding process, but time is the key factor for success, and young Canadians have an advantage in that respect.
Let’s take a look at Toronto-Dominion Bank (TSX:TD)(NYSE:TD) to see why it might be an interesting pick.
Impressive earnings
TD reported fiscal Q3 2017 net income of close to $2.8 billion. That’s right; the big, green machine earned more than $900 million per month in the quarter.
On a per-share basis, year-over-year Q3 revenue rose 7% and earnings increased 18%.
Customers who think their fees are too high might not like the news, but TD’s investors are all smiles.
U.S. exposure
TD is primarily known for its Canadian operations, and that’s the part of the business that generates the most profit, but the bank has a significant presence in the United States that deserves a closer look.
In fact, TD operates more branches south of the border than it does in the home country.
The U.S. retail division contributed US$678 million in net income in the quarter, which is attractive to investors who want a hedge against potential weakness in the Canadian economy.
Low risk
Critics of the Canadian banks say the big players are too exposed to the domestic housing market. A total meltdown in house prices would be negative, but most analysts anticipate a gradual pullback.
TD’s Canadian residential mortgage portfolio is large, but insured loans represent 44% of the pie, and the loan-to-value ratio on the uninsured mortgages is 53%. This means house prices would have to fall significantly before TD took a material hit.
TD is also widely viewed as the safest choice among the Canadian banks due to its focus on retail banking operations, which tend to be less volatile than capital markets activities.
Dividend growth
The company has a strong track record of raising the dividend, with a compound annual growth rate of 10% over the past 20 years.
Management is targeting earnings growth of at least 7% over the medium term, so investors should see the distribution continue to increase at a steady pace. The current payout provides a yield of 3.4%.
Returns
A $10,000 investment in TD two decades ago would be worth more than $100,000 today with the dividends reinvested.
There is no guarantee TD will generate the same returns over the next 20 years, but the company should continue to be a solid buy-and-hold pick for a dividend-focused RRSP or TFSA retirement fund.
