For investors seeking out a top dividend stock to buy that can assist them in generating $5,000 per year in tax-free passive income in a decade’s time, this article is certainly going to be a very compelling resource. I’ve been of the view that Fortis (TSX:FTS) is an excellent potential long-term holding, and that hasn’t changed. Aside from the company’s growth potential (tied to power demand tied to artificial intelligence, or AI, and other factors), I think this company is an absolute behemoth in the income world. In this article, I’m going to explore how much investors would need to stock away to generate $5,000 per year in annual income from this particular stock and do so tax-free.
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Start with a TFSA
For starters, investors looking to create tax-free income ought to start by opening a Tax-Free Savings Account (TFSA). These accounts, similar to the Roth IRA product in the U.S., allow Canadian investors to take advantage of the long-term growth in the stock market and realize no taxes when the positions in these funds are eventually closed out.
So, for retirees looking to build a durable and sustainable stream of cash flows in retirement (likely partly built from selling some positions that appreciated over time), this is the vehicle to use.
In the case of Fortis, which is a company that provides a great deal of its long-term growth via dividends, a TFSA can be an option, but this is a stock I’d put in a Registered Retirement Savings Plan (RRSP) as well. In either case, the company has seen incredible share price growth of late, and that’s something I think can continue given the company’s favourable valuation multiple and the tailwinds behind this sector right now.
Why Fortis looks like a buy right now
I often harp on Fortis’s track record of having more than 50 consecutive years of dividend increases as a reason to buy this stock. And it is. With a current yield of 4.2%, investors get access to a bond-like proxy with excellent dividend growth potential over the long term.
But it’s the company’s defensive business model in the regulated utility space I think drives most investor attention around this name. Utility companies like Fortis generate their revenue by providing heat and light to millions of customers, who are essentially locked into their monthly contracts (which can be raised each year according to regulatory guidelines. Fortis has continued to provide steady and consistent cash flow growth, which is then passed onto investors in the form of dividends, though other key factors have led to share price appreciation of late, including a surge of interest around utilities as a way to play the AI trade.
I think this culmination of positive factors for Fortis will be in play for a long time. This is a top stock I think investors can proudly own in a TFSA or RRSP for the long term, and it’s one I plan on holding as well.
