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Here Is Why This Monthly Dividend Stock Is a Good TFSA Candidate

Today’s environment doesn’t offer many options to young Canadians who are just starting their investing journey. Equity markets haven’t done much during the past decade, while bank saving accounts, GICs, and bonds are paying a too little in returns.

Despite this dismal situation, young savers have one thing on their side: they have a plenty of time. If you’re thinking building a portfolio for your retirement, the earlier you start, the more you will save, and the better the return you will make on your investments.

In Canada, the Tax-Free Savings Account (TFSA) is a great tool for young savers to launch their retirement funds. This is a tax-free vehicle, meaning you don’t have to pay tax on your capital gains and dividends. You can withdraw your investments anytime without a tax penalty. And any withdrawal doesn’t reduce your TFSA limit.

When you start picking stocks for your TFSA, it’s better to look for companies that pay regular dividends and have solid cash flows. The Toronto-based Enercare Inc. (TSX:ECI) is one such company. Let’s find out why it should be a good candidate for your TFSA.

Competitive advantage

When you pick a stock for your retirement fund, you should look for stocks that have wide economic moats — a term coined by Warren Buffett to describe businesses with a huge competitive advantages and recurring revenue-generating power.

Enercare is one of Canada’s largest home and commercial energy service companies, providing heating and cooling, electrical, and plumbing services to more than 1.2 million customers.

Its Service Experts division serves customers in 29 states in the U.S. and three provinces in Canada. Headquartered in Dallas, Service Experts is one of North America’s largest heating and air conditioning companies, with 90 locations.

Enercare is on a solid growth trajectory. After acquiring Service Experts for US$340 million in 2016, the company has further expanded its reach into several key markets in the U.S. with the acquisition of four home services businesses this year.

For long-term investors, this growth has been very productive so far. Since converting from an income fund to a corporation in 2011, Enercare has increased its dividend every year. In the six years, Enercare has raised its common share dividend by 48%. The company has a stable, defensible core business model, with 75% in recurring EBITDA and contract durations of +15 years.

The bottom line

Trading at $16.90 at the time of writing, Enercare stock has delivered 16% per year in total returns to its investors during the past five years. After a 13% dip in its share price, and with an annual dividend yield of 5.79%, I find valuations of this monthly dividend stock very compelling. The stock has about 40% upside potential if you look at the analysts’ consensus price estimate for the next 12 months.

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Fool contributor Haris Anwar has no position in the companies mentioned.

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