It is a general, well-accepted recommendation that investors maximize their contributions in their TFSA and RRSP accounts. These accounts provide tax-sheltered returns that allow you to grow your savings more quickly while compounding your returns by reinvesting dividends and gains. Ideally, investors can invest their TFSA and RRSP money in stocks that have long-term staying power, a strong history of shareholder value creation, a competitive advantage that can continue to be built on and expanded, and strong barriers to entry.
Let’s take a look at two market leaders that display all of these characteristics and more. These stocks are prime candidates that you can consider adding to your TFSA and/or RRSP today for long-term wealth creation in the form of reliable dividend income and capital gains.
Canadian Pacific Railway
The railway industry has all of the above characteristics, with high barriers to entry being one of the most significant variables that protects the companies within this industry.
Up 76.5% since the beginning of 2016, Canadian Pacific Railway (TSX:CP)(NYSE:CP) has been the better-performing railway in the last few years, as it has successfully and effectively reduced costs and improved efficiencies.
In the railway business, the operating ratio, which measures profitability and is calculated by dividing operating expenses by revenue, is an ideal measure to focus on. Twenty years ago, operating ratios were close to 90% for the railway industry, which seems quite shocking now when we are used to seeing the rail companies post operating ratios in the 60% range.
But it was during these years, when railway executives embarked on an aggressive strategy of cutting costs and improving efficiencies by managing details such as train length, speed, carloads, and time at terminals, that the railways became free cash flow-generating giants and railway stocks began their steady rise.
CP Rail stock has not only given investors strong capital gains, but also dividend growth, and with a more than 13% five-year CAGR in dividends, shareholders have been happily accumulating wealth with the help of CP Rail stock.
Another industry leader that is protected by high barriers to entry and its strong competitive advantages is BCE (TSX:BCE)(NYSE:BCE).
As the market leader in internet and TV and one of the largest wireless operators in Canada, BCE is Canada’s largest telecommunications company with a history of strong dividend increases and steady stock price increases, giving investors long-term reliable growth and stability, making it perfect for your TFSA and/or your RRSP.
In the last 10 years, BCE has increased its dividend by 117% to the current $3.17 per share. The latest increase was a 5% increase in the first quarter, and the current dividend yield for BCE stock is a generous 5.23%.
Armed with a powerful balance sheet and strong cash flow generation, BCE is well positioned to continue to build its network for the future. In the first quarter of 2019, BCE generated $642 million (+19%) in free cash flow, which follows 2018 free cash flow of more than $3.6 billion. This leaves BCE with ample firepower to build its fibre-to-the-home network, which used optical fibre as a replacement to the existing copper infrastructure, providing customers with unprecedented high-speed internet access.
BCE stock can be seen as somewhat of a bond proxy, and with interest rates looking to go lower again this year, this safe, high-yield dividend stock is still looking very attractive from a more macro standpoint as well.
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Fool contributor Karen Thomas has no position in any of the stocks mentioned.