Long-term investing is the perfect strategy for people who are more than two decades away from retirement. Canadians are fortunate, because they have a natural home for long-term savings. The Tax-Free Savings Account (TFSA) is the most flexible investment account by far in the country.
Your TFSA is the only place where you can hold interest-bearing or income-producing investments and be free of taxes for life. If growing a nest egg or retirement fund is your focus, it would be advantageous to lean more towards dividend stocks. The best part is that you can hang on for the long term, notwithstanding market volatility.
Benefits of long-term investing
Some stock market participants blow up a considerable amount of money through frequent trading. You pay commission, brokerage charges, or taxes. The Canada Revenue Agency (CRA) prohibits the same in a TFSA. Otherwise, the tax agency will treat your earnings as business income and, therefore, subject to tax.
The practical approach is to select established dividend payers like Bank of Montreal (TSX:BMO)(NYSE:BMO) and Emera (TSX:EMA). You can coast along with the spikes and dips of the market and still harvest the rewards when you retire.
Tireless income stream
TFSA investors don’t need to scrutinize BMO inside and out. Canada’s fourth-largest bank, with a market capitalization of $75.05 billion, was the first company ever to pay dividends. Its 191-year dividend track record speaks for itself. Over the last 20 years, the total return is 655.48% (10.63% CAGR).
At $116.01 per share (+22.28% year-to-date gain), BMO’s dividend offer is $3.65%. Your $100,000 investment today should compound to $245,037.56 in 25 years. Revenue generation isn’t a concern, as BMO is highly diversified by businesses and geographies. While Canada accounts for almost 60% of net income, the bank operates in the U.S. (30%) and internationally (10%).
One interesting piece of data is that the bank stock is a far superior dividend-growth investment from a total return perspective versus the BMO Monthly Income Fund.
Imminent dividend growth
Emera is synonymous with dividends plus growth. The $14.15 billion utility firm is a leading diversified energy and services company in North America. At the current share price of $55.87, the dividend yield is a hefty 4.56%. Your income stream should be recurring, as Emera derives revenue from a regulated portfolio of electric and natural gas utilities and natural gas pipelines.
The U.S. market contributes the most to Emera’s earnings (65%), particularly the Florida Electric Utility. Its investments in renewable and clean generation assets are also growing. Overall, the company’s strong regulated asset base provides quality, capacity, and earnings diversity.
Finally, Emera is a Dividend Aristocrat. TFSA investors should know that this utility stock has a solid history of growing dividends, too. The stock has achieved a dividend-per-share growth of more than 8% CAGR in the last 10 years. Management’s goal is to deliver between 4% and 5% annual dividend growth through 2022.
Learn from Einstein
Albert Einstein once said, “Compounding is the eighth wonder of the world. He who understands it, earns it. He who doesn’t pays it.” His quote describes how the element of compounding can work for TFSA investors. The power of compounding will magnify the more time you invest in a stock. Your investments will undoubtedly grow exponentially over time.