RRSP Investors: How to Build Retirement Wealth With Top Canadian Dividend Stocks
Canadian savers use their self-directed Registered Retirement Savings Plan (RRSP) to create portfolios of investments for retirement. A popular investment strategy is to own high-quality dividend-paying stocks and use the dividends to buy new stocks. The compounding process can turn small initial investments into significant savings over the course of two or three decades.
fortis
fortis (TSX:FTS)(NYSE:FTS) owns power generation, transmission and natural gas distribution businesses in Canada, the United States and the Caribbean. The company derives 99% of its revenue from regulated assets. This means the revenue stream is typically predictable, making it easier for management to plan for investments and commit to dividend increases.
Fortis is currently working on a $20 billion capital program that will increase the interest base by about a third through 2026. Management expects cash flow to grow enough to support its target 6% compound annual dividend increase through at least 2025. This is a good forecast the current situation of economic uncertainty. Economists generally assumed that Canada and the United States would experience a recession in 2023 or 2024.
Fortis has increased the dividend for each of the last 48 years, so investors should be confident that the board will deliver on planned dividend increases. At the time of writing, the dividend offers a 3.5% yield. Fortis offers investors a 2% rebate on shares purchased under the dividend reinvestment plan.
Long-term holders of Fortis shares have enjoyed solid returns. A $10,000 investment in Fortis 25 years ago would be worth about $180,000 today if the dividends were reinvested.
TD bank
TD (TSX:TD)(NYSE:TD) increased its dividend by 13% late last year and has had a compound annual dividend growth rate of more than 10% over the past two decades. That’s the kind of dividend growth that RRSP investors like to see when they take a buy-and-hold approach to investing and use dividends to buy new stocks.
TD shares currently appear cheap to buy for a self-directed RRSP. The stock price is just $88 at the time of writing, compared to $109 earlier this year. Bank stocks have been sold off in recent months on mounting recession fears, but the pullback seems overdone. An economic downturn could slow sales growth and trigger higher loan losses. A rise in corporate and personal bankruptcies is likely as interest rates rise and inflation remains high, but a deep and prolonged recession is not expected.
TD is strongly capitalized with a Common Equity Tier 1 ratio of 14.7% at the end of the second fiscal quarter of 2022 and continues to grow its revenues and profits. Adjusted net income increased about 5.5% to $7.54 billion for the first half of fiscal 2022 compared to the same period in 2021.
TD has the capital needed to weather a downturn and is using its excess cash to make two acquisitions in the United States to fuel future growth. TD buys retail bank First Horizon for $13.4 billion and investment bank Cowen for $1.3 billion.
TD’s current dividend offers a 4% yield. A $10,000 investment in TD stock 25 years ago would be worth about $200,000 today if the dividends were reinvested.
The quintessential top dividend stocks to buy for a self-directed RRSP
Fortis and TD pay attractive dividends that should continue to grow steadily. The stocks have delivered great total returns for investors and still deserve to be anchor points for a self-directed RRSP.