Seeking to boost your savings? Then look no further than Canada’s Dividend Aristocrats — stocks listed on the TSX that possess a market cap of greater than $300 million and have raised their dividend for at least the last five years straight. They provide long-term investors with an ideal opportunity to access the magic of compounding and super-size their returns, allowing them to achieve their investment goals sooner.
With interest rates near historical lows, traditional income-producing investments such as bonds and guaranteed investment certificates (GICs) are generating poor returns for investors. Canadian government 10-year bonds are currently yielding around 1.5%, whereas GICs are yielding up to 3.25% depending on the terms of the instrument. There is growing speculation that Bank of Canada will cut interest rates because of weaker-than-anticipated economic growth, which would be a blow for retirees and other income-focused investors.
Reach your goals sooner
One Dividend Aristocrat with an impressive history of distribution increases that provides a superior yield of just over 6% is Brookfield Renewable Partners (TSX:BEP.UN)(NYSE:BEP). The partnership’s yield is significantly greater than the traditional income-producing assets such as bonds and GICs. That gives investors a considerable financial advantage over those choosing to use financial instruments to achieve their financial goals.
A TFSA, because of its tax-effective nature, is the ideal vehicle in which to hold any long-term investment. This is because interest, dividends, and capital gains earned in a TFSA are tax-free for life, and there are no restrictions on withdrawals, which are also tax-free. The main consideration when utilizing a TFSA is the contribution limit which for 2019 is $6,000, which is a $500 increase over 2018.
Brookfield Renewable is an ideal investment to maximize the magic of compounding.
You see, if you’d invested $5,000 into a GIC yielding 3% and contributed $5,000 annually, it would take almost eight years to save $50,000.
However, if you purchased $5,000 of Brookfield Renewable stock, invested another $5,000 annually, and reinvested all dividends paid, based on its historical 10-year performance, it would take around five-and-a-half years to achieve that goal. While stocks are more volatile than bonds and have greater investment risk than GICs, meaning that they can decline sharply in value over the short term, Brookfield Renewable is an ideal long-term investment.
It possesses the defensive characteristics of a traditional electric utility, but it is not weighed down by the significant costs associated with converting its facilities to cleaner forms of power generation. This is because Brookfield Renewable’s 17,000 megawatts (MW) of installed capacity is generated by renewable sources of energy.
Brookfield Renewable is delivering solid results. First-quarter 2019 proportionate electricity generation rose by 8% year over year to 7,246 gigawatt hours (GWh), which was also 7% greater than the projected long-term average. This notable improvement can be attributed to improved hydrology and operating conditions. That in turn gave funds from operations (FFO) and net income a healthy bump, to see them up by 18% and 438% year over year, respectively.
There is every sign that FFO and net income will continue to grow. Brookfield Renewable has focused on reducing costs and, where possible, increasing the price it receives per megawatt hour (MWh) sold. The partnership commissioned a 19 MW hydro facility in Brazil, which is estimated to add around US$2 million annually to its FFO, and it has 134 MW of projects under development that are expected to commence operations by the end of 2021. Brookfield Renewable also entered a $750 million deal with electric utility TransAlta, giving it exposure to that company’s 813 MW hydroelectric portfolio in Alberta.
Importantly, Brookfield Renewable’s distribution has a trailing 12-month payout ratio of 87% of FFO, meaning that not only is it sustainable, but if earnings expand as planned, then another annual distribution hike is likely.
These characteristics make Brookfield Renewable the ideal stock for investors seeking to grow their wealth over the long term, particularly when it is held in a TFSA because of its favourable tax treatment.
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Fool contributor Matt Smith has no position in any of the stocks mentioned. Brookfield Renewable Partners is a recommendation of Dividend Investor Canada.