Written by Daniel Da Costa at The Motley Fool Canada
Compound interest can be extremely powerful, especially for long investment timeframes. However, investing for the long term and maximizing the power of compounding takes discipline and patience, as it requires implementing a buy and hold strategy.
Any investment can grow and accumulate over the long term, but dividend-paying stocks that return investors capital in addition to growing in value are some of the best out there. These are often high quality companies that are reliable and able to extract profits from the business to compensate investors.
So if you’re looking to find high-quality dividend-paying stocks that you can buy and hold for the long term and reap the power of compound interest, here are three of the best investments you can make today.
A high-end utility stock
Some of the most popular stocks to buy in this environment are defensive stocks such as utilities. In addition to the resilience they provide during periods of volatility, investors also benefit from their dividend yields and dividend growth profiles.
For instance, Emera (TSX:EMA) is a stock that has a long track record of solid execution. It has increased its dividend for 15 consecutive years and now offers an attractive yield of over 4.6%. In addition, it plans to increase the dividend by at least 4% per year until 2024.
This is attractive passive income, and growth in Emera’s profitability and payouts to investors is what drives long-term share price growth.
As a result, investors who have held Emera over the past decade have earned a total return of approximately 160%, or a compound annual growth rate (CAGR) of 10%. So if you’re looking to take advantage of long-term compound interest, dividend-growing stocks like Emera are great investments to consider.
High-quality growth stocks can help boost your portfolio growth
Besides dividend-growing stocks like Emera that offer higher dividend yields, companies that pay a much lower dividend but grow their business quickly can be great investments.
If you’re looking to use compound interest to your advantage, two high-quality growth stocks you might consider for your portfolio are Dollarama (TSX:DOL) and Brookfield Asset Management (TSX: BAM.A)(NYSE: BAM).
Dollarama and Brookfield are two of the best Canadian stocks you can buy and hold for the long term. They both offer relatively low dividend yields, but since they are such high-quality operators and are constantly expanding their businesses, they accumulate investor capital quickly, which is why they have earned such large returns.
In Dollarama’s case, the company took advantage of changing consumer habits by building more stores and increasing same-store sales growth. With Brookfield, the company continues to perform well, owning many high quality and alternative assets such as infrastructure and renewable energy.
Both of these companies can certainly run into short-term difficulties from time to time. But in the long term, they offer great potential, which is why long-term investing is the best strategy.
Over the past 10 years, Brookfield investors have achieved a total return of 360% or a CAGR of 16.5%, truly impressive growth. Meanwhile, Dollarama investors did even better, earning total returns of 675% or a CAGR of 22.75%.
These are two of many stocks that have posted incredible numbers in the past and have the potential to continue to grow. However, it is crucial to ensure that you are investing for the long term in order to benefit from this important compound interest.
The Basics of Long-Term Investing and Compound Interest
If you had invested $5,000 in each of these three stocks as part of a well-diversified portfolio just ten years ago, they would have a combined value of just under $75,000, and that’s after the massive sell-off we’ve seen this year. !
So, if you’re looking to add stocks to your portfolio in this environment, consider dividend-paying stocks and remember to think long-term in order to reap the spoils of compound interest.
The post Compound Interest: 3 Dividend Stocks That Can Make You Rich appeared first on The Motley Fool Canada.
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See the 5 Actions * Returns from 09/14/22
Foolish contributor Daniel Da Costa holds positions at Brookfield Asset Management Inc. CL.A LV. The Motley Fool recommends Brookfield Asset Management, Brookfield Asset Management Inc. CL.A LV and EMERA INCORPORATED. The Motley Fool has a disclosure policy.