Time is money. Time can work in your favour by compounding returns. The longer you allow your investments to grow in terms of years, the less risk you can take for a reasonable rate of return.
In other words, the sooner you start putting your money to work, the less risk you’ll have to grow your hard-earned savings into a big sum of money.
The longer your investments are allowed to grow, the bigger the sum of money
Let’s say Sam started investing $1,000 a year since he was 25 years old compared to Tammy, who started investing $1,000 a year since she was 35 years old.
If both are able to earn a rate of return of 7%, by the time they’re 50 years old, Sam’s portfolio would be worth $67,676 and Tammy’s would be worth $26,888.
If Tammy wanted her portfolio to match Sam’s by 50, she had to save more or aimed for higher returns and likely take on more risk in the process.
Invest more as you earn more
The more likely scenario would be that both could save and invest more as their salaries increase because they gain work experience and become more efficient at what they do.
It can only work in your favour if you increase your savings rate as you earn more throughout your life, so you can lead a comfortable retirement when you want it to happen.
What should you invest in?
Over the long term, stocks in general have tended to generate above-average returns compared to other investments. Stocks with track records of growing their dividends show that they have a strong culture of dividend growth and have the ability to grow their profitability over time.
Moreover, dividend stocks are usually less volatile than non-dividend payers. So, dividend stocks are easier to hold on to throughout market ups and downs.
The top Canadian publicly trading stocks with the longest dividend-growth histories are utilities. Canadian Utilities Limited (TSX:CU) and Fortis Inc. (TSX:FTS)(NYSE:FTS) take the top two spots, having increased their dividends for 45 and 43 consecutive years, respectively!
Canadian Utilities yields nearly 3.9%, and Fortis yields almost 3.8%. Canadian Utilities just hiked its dividend by 10% this month. Fortis last hiked its dividend by 6.6% in the fourth quarter of 2016. Their payout ratios are both expected to be sustainable at about 65% this year.
Investor takeaway
The sooner you save and invest, the sooner your hard-earned savings can start working hard for you. The earlier you invest, the less risk you can choose to take. Investors can have peace of mind by investing in long-term dividend-growth stocks instead of betting on hot stocks.
