Canadian millennials are concerned about setting enough cash aside for retirement.
This wasn’t as big an issue for their parents or grandparents, who likely worked for the same company for their entire careers and retired with generous defined-benefit pensions.
If the boomers don’t have fat pension packages, the value of their homes has probably increased significantly, and that can be used as a retirement safety net.
Young homebuyers today can’t count on the same returns from their properties. House prices are extremely high in many markets, and rising interest rates combined with regulatory changes could trigger an extended period of price stagnation or even declines.
As a result, many Canadians have to find other ways to save for their golden years, and one option is to buy dividend-growth stocks inside an RRSP and invest the distributions in new shares.
The strategy is particularly attractive for investors who are in higher tax brackets, as the contributions can be used to reduce taxable income.
Let’s take a look at a top dividend-growth stock that deserves to be on your radar.
Toronto-Dominion Bank (TSX:TD)(NYSE:TD)
TD generated $10.5 billion in net income for fiscal 2017, which is up from $8.9 billion the previous year.
That might not impress customers who complain about their fees being too high, but it is great news for investors.
The company is widely viewed as the safest of the Canadian banks due to its heavy focus on retail banking, and a significant presence in the United States provides a nice hedge against any potential economic downturn in Canada.
The U.S. operations contribute more than 30% of TD’s net income.
The bank has a strong track record of raising the dividend, with a compound annual dividend-growth rate of 10% over the past 20 years. At the time of writing, the stock provides a yield of 3.2%.
Management is targeting annual earnings-per-share growth of at least 7% over the medium term, and investors should see the dividend increase in step.
Rising interest rates have some investors concerned the banks could be hit by a wave of mortgage defaults. A total crash in the housing market would definitely be negative, but most analysts predict a gradual decline, and TD’s mortgage portfolio is capable of riding out a downturn.
Overall, higher interest rates should be a net benefit for the bank.
The economic outlook in Canada and the U.S. is positive, so TD could beat its earnings growth target.
What about returns?
A $10,000 investment in TD two decades ago would be worth more than $100,000 today with the dividends reinvested.
The bottom line
With discipline and patience, millennials should be able to set aside enough cash to fund a comfortable retirement.
There is no guarantee TD will generate the same returns over the next 20 years, but the strategy of owning dividend-growth stocks and reinvesting the distributions in new shares is a proven one.
Young investors should also consider some of the under-the-radar opportunities in the market, as not everyone is fully aware of their long-term potential.
