Ten years doesn’t sound particularly terrifying. At 35, age 45 still feels close enough to be basically the same person, perhaps with a better mattress and stronger opinions about property taxes. Financially, though, those 10 years can be enormous.
Imagine investing $500 every month and earning an average annual return of 8%, compounded monthly. Start at 35 and continue until 65, and you’d finish with roughly $745,180. Wait until 45, make the exact same $500 monthly investment, and you’d have about $294,510.
That’s a difference of approximately $450,670. The painful part? You only skipped $60,000 of actual contributions.
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The missing decade
Starting at 35 means contributing $180,000 over 30 years. Starting at 45 means contributing $120,000 over 20 years. Yet the earlier investor winds up hundreds of thousands of dollars further ahead because those first contributions have decades to produce returns, then returns on those returns.
The Financial Consumer Agency of Canada makes the same basic point when discussing retirement planning: saving earlier can mean needing to save less each month because your money has more time to compound. Here’s what the illustration looks like.
| AGE | START AT 35 | START AT 45 |
|---|---|---|
| 45 | $91,473 | $0 |
| 55 | $294,510 | $91,473 |
| 65 | $745,180 | $294,510 |
An 8% annual return certainly isn’t guaranteed. Stocks rise, fall, throw tantrums, and occasionally make investors question every decision they’ve made since breakfast. The point isn’t that your portfolio will produce precisely 8%. It’s that time which gives compounding more opportunities to work.
That’s why investors in their 30s may have an advantage even if they can’t invest enormous amounts yet. Learning about buying stocks in Canada and consistently putting a manageable amount to work can be more powerful than waiting for the perfect salary, market crash, or magical moment when investing suddenly feels easy.
H
For a portfolio meant to sit there for decades, I’d want businesses that can keep earning, investing, and preferably paying me along the way. Hydro One (TSX: H) offers an interesting example.
Hydro One owns and operates much of Ontario’s electricity transmission and distribution system, serving about 1.5 million customers. Electricity demand isn’t disappearing because consumers suddenly decide power grids are overrated. Ontario needs substantial grid investment as its population grows, industries electrify, and new power generation connects to the system.
That growth is already showing up in Hydro One’s numbers. Second-quarter earnings per share (EPS) increased to $0.62 from $0.54 a year earlier, while net income rose to $370 million from $327 million. Hydro One also invested $812 million in its system during the quarter.
Several major transmission projects are moving forward as well, including the roughly $1.9 billion Northeast Power Line and $1.2 billion Longwood-to-Lakeshore project. Those investments can expand the asset base Hydro One earns regulated returns on, creating a relatively straightforward long-term growth story.
Earning income
Hydro One stock currently pays a quarterly dividend of $0.35 per share, or about $1.41 annualized. Around a recent share price near $55, that works out to a yield of roughly 2.6%.
| COMPANY | RECENT PRICE | QUARTERLY DIVIDEND | ANNUAL DIVIDEND | DIVIDEND YIELD | FREQUENCY |
|---|---|---|---|---|---|
| H | $55.00 | $0.35 | $1.41 | 2.6% | Quarterly |
That won’t make anyone abandon their day job tomorrow. For someone investing at 35, however, the appeal is what decades of reinvestment can potentially do. Reinvesting dividends into additional shares allows those shares to produce dividends of their own, which is why I prefer growing businesses over simply chasing the highest yield among Canadian dividend stocks.
Hydro One stock isn’t cheap at roughly 23 times earnings, and utilities remain sensitive to interest rates because they finance enormous capital programs. Regulatory decisions and construction costs can also affect returns. Still, waiting for every condition to become perfect introduces a different risk. Another birthday arrives while your money does absolutely nothing.
Bottom line
The investor starting with $500 a month at 35 doesn’t need to be brilliant. They don’t need to predict the next crash, find the next ten-bagger, or invest thousands every payday. They mainly need to start. Thirty years of compounding can do an astonishing amount of the heavy lifting, provided you actually give it the full 30 years.
