A lot of attention has been focused on TFSAs in recent years, but the RRSP still serves as a valuable savings tool.
RRSPs have the advantage of reducing your taxable income, which can be a substantial amount if you are in a high tax bracket. The RRSP contribution limit is also significantly higher than the TFSA, so investors can put more money into it.
Another nice thing about the RRSP is the fact that investors are more likely to leave the funds alone. The TFSA is designed to serve as a savings tool for a variety of funding needs; it is not specifically a retirement-planning vehicle. As such, there is more temptation to tap the funds for non-essential expenditures.
Knowing that you have to pay taxes when you remove RRSP contributions is a good incentive to keep the funds invested and growing until retirement.
Which stocks should you pick?
If you manage your RRSP in a self-directed account, you want to pick stocks that have long histories of rising earnings and dividend growth. Ideally, these stocks should also be market leaders and operate industries with high barriers to entry.
With that in mind, I think investors should consider BCE Inc. (TSX:BCE)(NYSE:BCE) and Royal Bank of Canada (TSX:RY)(NYSE:RY).
BCE
BCE holds a dominant position in an industry with very few serious competitors. That might not please the government or consumers who think prices are too high, but it is great news for investors.
The Canadian telecom sector is unique in that the country is enormous, but the population is actually quite small. Those two factors are the reasons why BCE and its peers are unlikely to see a large international competitor enter the market and try to eat their lunch.
The costs of building a national network from scratch would be prohibitive, and there simply aren’t enough potential consumers in the market to justify the expense. To put things into perspective, Canada’s entire population is about 36 million. The greater Tokyo-Yokohama area alone has a population of 38 million.
BCE invests heavily in its network to ensure the company remains leading edge, but it also puts a nice share of the profits in the pockets of investors. The quarterly dividend of $0.65 per share yields about 4.5%.
Royal Bank
Royal Bank is another Canadian cash machine. In its fiscal Q3 earnings statement the bank reported net income of $2.475 billion. That’s a ton of money for just three months of operations.
The Canadian market is a bit jittery these days as investors fret about the rising risks of a housing crash and the long-term economic effects of the downturn in the oil market. Royal Bank has navigated through every major economic crisis of past 150 years and will find a way to survive any new threats that might arise.
The company pays a dividend of $0.79 per share that yields about 4.2%.
