Today’s graduates are faced with a very different employment market than the one that welcomed their parents.
Companies are shifting more jobs to contracts, and grads often have to “volunteer” their time as interns for several months before getting a paid position. For those who are fortunate enough to score a full-time gig, the odds of getting a defined-benefit pension are pretty slim. In fact, any pension benefit at all is considered a bonus these days.
As a result, young people are required to take control of their retirement planning and set savings aside to cover their living costs later in life.
One way to do this is to buy dividend-growth stocks inside a TFSA.
What’s the advantage of the TFSA?
The TFSA allows investors to protect income from the taxman. That means the full value of dividends earned in the account can be reinvested in new shares, and when the time comes to cash out the investments, all the capital gains go straight into your pocket.
Young people can benefit the most because they have the time needed to let the power of compounding work its magic. In fact, a modest initial investment can turn into a significant savings fund over the course of 20 or 30 years.
Which stocks should you buy?
The ideal companies are market leaders with long histories of dividend growth that’s supported by rising revenues.
Let’s take a look at Enbridge Inc. (TSX:ENB)(NYSE:ENB) to see why it is an attractive pick.
Enbridge operates the world’s longest crude oil and liquids transportation system with an impressive infrastructure network that cuts a path right across Canada and extends through the heart of U.S. to the Gulf Coast.
The company doesn’t produce oil, gas, or gas liquids; it simply moves the product from the point of production to the end user and charges a fee for providing the service.
Most of Enbridge’s contracts are long-term agreements with the largest players in the energy sector, and new infrastructure isn’t built until the required throughput to justify the pipeline is commercially secured.
That’s attractive for investors because it means revenue and cash flow should be predictable and reliable.
Enbridge pays a quarterly dividend of $0.53 per share that yields 4%. The company plans to increase the payout by 8-10% per year through 2019 as new assets go into service.
The returns?
A $10,000 investment in Enbridge in 1996 would be worth $357,000 today with the dividends reinvested.
There is no guarantee Enbridge will deliver the same results over the next two decades, but the stock is a great example of how an investor can use the TFSA to build substantial savings for retirement.
