Young Canadians are searching for ways to set aside some cash to fund a comfortable retirement.
This wasn’t always a big concern, but the employment world has changed over the past 20 years, and people are being forced to shoulder more of the burden of their retirement planning than was necessary in the past.
Why?
Full-time jobs are harder to find right out of college or university, and when a permanent gig finally comes along, the generous benefits packages that the boomers enjoyed are quickly disappearing. Aside from government jobs and positions at some large corporations, the classic defined-benefit pension plans that guarantee a certain payout at retirement are pretty much history.
Any pension plan at all is pretty much a bonus these days, and when one is provided, it tends to be a defined-contribution program, which shifts the risk on to the shoulders of the employee.
In addition, many young people are choosing to be self-employed and prefer the flexibility that comes with being a contract worker. This is an appealing option for work-life balance and having the freedom to work where and when you want, but it also means added responsibility for retirement planning.
TFSA attraction
One popular option for saving for the golden years involves holding dividend-growth stocks inside a TFSA and using the distributions to acquire more shares. The payouts are not taxed inside the TFSA, so the full value can be reinvested, and when the time comes to cash out, any increase in the stock price is also yours to keep.
Which stocks should you buy?
The best companies tend to have strong track records of dividend growth and operate businesses with reliable revenue streams.
Let’s take a look at Fortis Inc. (TSX:FTS)(NYSE:FTS) to see if it deserves to be a top pick.
Growth
Fortis has grown over the years through strategic acquisitions, including the US$11.3 billion purchase of Michigan-based ITC Holdings in 2016. That deal came on the heels of the US$4.5 billion takeover of Arizona-based UNS Energy in 2014. The focus on the United States gives investors good exposure to the U.S. through a Canadian company, and the bottom line can get a nice boost when the American dollar gains against the loonie.
Fortis plans to raise its dividend by at least 6% per year through 2022, supported by cash flow growth that should come from the recent acquisitions, as well as a $14.5 billion five-year capital plan that should increase the rate base. The company gets most of its revenue from regulated assets and has raised the distribution every year for more than four decades, so investors should feel comfortable with the guidance.
The stock currently provides a yield of 4%.
Should you buy?
Fortis should continue to be a top buy-and-hold pick for a dividend-focused portfolio.
A $10,000 investment in the stock just 20 years ago would be worth more than $75,000 today with the dividends reinvested. There is no guarantee Fortis will deliver the same results over the next two decades, but the strategy of holding quality dividend stocks and investing the distributions in new shares is a proven one.
