Investing in dividend stocks is one of the best ways to boost the savings rate of your Tax-Free Savings Account (TFSA). The companies that pay regular dividends and let you re-invest your payouts to buy more of their shares are your best friends during your long journey of investing.
The biggest attraction I see for investing in dividend stocks is that you can compound your money. Compounding is a simple strategy when you buy investments that pay dividends or interest, and you use those payments to buy more of the investment. In other words, you get to buy new shares of stock without having to put up another dollar.
That said, this investment style isn’t good for people who are in rush. This is a strategy that works for investors who have patience and who buy stocks to become partners in businesses.
If you’re ready to spare some of your cash to start building your nest egg, then it’s best to use your TFSA to buy some solid dividend stocks. Here are my two favourite picks.
Bank of Nova Scotia
Among Canada’s top lenders, Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) has one of the most consistent records of rewarding its investors through rising payouts. The lender has paid a dividend every year since 1832, while it has hiked its payouts in 43 of the last 45 years.
The biggest worry for income investors while picking any dividend stock is the safety and continuity of their income. With a payout ratio of just 43%, BNS’s dividend is pretty safe.
Once you buy stock like BNS, you don’t sell it. Your payouts get re-invested, and your savings multiply, bumping your rate of return.
During the past 10 years, BNS shares have delivered a total return of ~72%, despite going through one of the biggest financial crises of our times in 2008. Trading at $80.29 and with an annual dividend yield of 4.08%, BNS is a great long-term investment with good potential to double your money.
Just like banks, telecom operators offer another avenue to earn dividends and re-invest the payouts back to buy more shares. Canada’s largest network operator, BCE Inc. (TSX:BCE)(NYSE:BCE), has been a great cash machine for income-seeking investors for decades.
The company has invested tens of billions of dollars in everything from wireless to data lines to media assets, as it rapidly expands broadband fibre and wireless network infrastructure throughout Canada.
After a recent pullback in its share price, BCE’s dividend yield has reached an attractive 5.5%, which is higher than its five-year average of 4.86%. Given the company’s ability to generate hefty cash flows amid the growing nature of its business, I think BCE is a good bargain at current levels.
In February, BCE shareholders got a 5.2% hike in its annual payout, which now stands at $3.02 a share. This dividend hike was BCE’s 14th increase since 2008, helping investors to double the amount they get during the past decade.
The bottom line
Buying top dividend stocks and holding them over a long haul is what smart investors do to secure their financial future. You should launch your TFSA with a similar aim and stash it with stocks such as BCE and BNS.