You get to grow your money tax-free in your Tax-Free Savings Account (TFSA). So, it makes perfect sense to save regularly and maximize your TFSA every year. The earliest adopters of the TFSA could have contributed at least $88,000 since 2009. I say “at least” because they could have made money in the TFSA, made some withdrawals, and re-contributed the amounts.
Wouldn’t you love to turn your TFSA into a gold mine? Here’s a cool investing strategy I’d like to share with you. Let’s say you’re starting with $10,000. You can, at least initially, strive for more reliable returns with dividend investing.
Solid dividend stocks can give you a positive return every year from the dividend income generated, regardless of where the stock prices go. That said, if the business is doing things right and you bought the stocks at good valuations, you should see your portfolio value head higher in the long run.
Fortis stock
For example, Fortis (TSX:FTS) stock has delivered solid annualized returns of about 9.8% in the last 10 years, despite the stock declining meaningfully by about 11% from the peak in May. Utilities are naturally capital intensive and have high debt levels. In a higher interest rate environment, Fortis’s cost of capital has increased. Additionally, fixed-income investments have also become better competitors for capital from income investors.
That said, Fortis stock has dropped to a decent valuation. At $53.63 per share, it trades at about 18.4 times earnings. The regulated utility stock tends to trade at a premium valuation due to the predictability of its business, which generally translates to more certainty and resilient earnings. This is why it has one of the longest dividend-growth streaks and is among the top Canadian dividend-growth stocks.
Specifically, Fortis stock has increased its dividend for 49 consecutive years with a 10-year dividend-growth rate of approximately 6%. Because of a higher cost of capital leading to slower growth, Fortis projects lower dividend growth of 4-6% per year through 2027. Let’s take the midpoint and call it a dividend growth rate of 5%.
At writing, the stock offers a safe dividend yield of 4.2%. Assuming a 5% dividend hike next month, investors are looking at a forward yield of 4.4%. So, we can approximate annualized returns of roughly 9-10% for the stock. With valuation expansion, the total returns could jump to 11-12% per year over the next five years. Regardless, it would be a satisfying return in a blue-chip stock that’s quite defensive.
Investor takeaway
If you invest $10,000 in Fortis stock, it would initially generate about $421 in annual dividends (paid across four quarters). As stated earlier, this annual income could jump to about $442 next month. And in subsequent years, it’s likely to continue growing.
According to our approximated returns, your initial $10,000 investment in Fortis could transform into a total of $15,386 to $17,623 in five years (including dividends). However, it would be wise of investors to save and invest more. Imagine populating additional money (and even reinvesting the dividends) into more solid dividend stocks for your diversified TFSA portfolio. You’d be churning out more income and building greater wealth, turning your TFSA into a gold mine.
