If you’re a new investor just thinking about launching your Tax-Free Savings Account (TFSA), buying some quality dividend-growth stocks should be the key part of your investing strategy.
There are many reasons why dividend-growth stocks are my favourite investments, but here are the two most important ones that all new TFSA savers should know.
For any equity investment that aims to build savings for retirement, stability is the key. You don’t want too much volatility and unpredictability in your portfolio. In other words, you’re not in the market to make a quick buck and run away with your money. Your main objective is to slowly build your nest egg with regular contributions, usually with an investing horizon of 30-40 years.
Companies with long histories of paying dividends work the best. Pick companies that usually belong to old and boring industries, but the businesses they run produce strong cash flows. Think about banking and telecom utilities. No matter what happens to the economy, you won’t be able to live a normal life without your bank account and a reliable internet service.
These companies offer very simple services and, in return, collect regular service fees. The recurring nature of their businesses makes them ripe for long-term investors, whose objective is to earn steady returns in the shape of growing dividends for the next three or four decades.
Another important reason I like dividend-growth stocks is that their managements love to reward their shareholders with regular hikes in payouts. These cash distributions are your share of the profit a company has made, which it wants to distribute among its investors. Such companies not only pay regular dividends, but they also grow them each year.
Growing dividends helps you in many ways. First, they provide a good hedge against inflation, meaning they protect the value of your investment when the prices of everything rise. Second, dividend-growth stocks unlock the powerful process of compounding if you re-invest your profit to buy more shares of the same companies.
So, with these benefits in mind, you should use your TFSA to add some quality dividend-growth stocks. Invest in companies with long histories of rewarding their investors and that have made their intentions public about future hikes.
Two Canadian dividend-growth stocks
In Canada, banks and telecom utilities are among the safest stocks for your dividend-growth portfolio. Among the top Canadian lenders, Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is my top pick. After an 11% jump in its payout this year, income investors in TD stock now earn a $0.67-a-share quarterly dividend, which translates into a 3.69% yield on yearly basis. The bank is likely to grow its dividend payout between 7% and 10% each year going forward.
Telus Corporation (TSX:T)(NYSE:TU), one of the three top telecom operators in Canada, is another reliable player to earn a steady revenue stream. Telus is targeting 7-10% growth in its dividend each year until 2019. And this target does not seem too ambitious, given the company’s ability to generate more cash from its growing customer base throughout Canada.
With a current dividend yield of 4.40%, Telus pays a quarterly dividend of $0.505 a share, which translates into $2.02 per share annually. Telus is well on track for 2018, marking the 15th straight year in which it has hiked its annual dividend.
The bottom line
These two stocks are just an example of the companies you should look for while building your TFSA. Insurance companies, power and gas utilities, and real estate investment trusts provide other avenues for income generation.
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Fool contributor Haris Anwar has no position in the companies mentioned in this article.