Self-directed RRSP investors are using dividend stocks to help build retirement portfolios that can provide income to supplement their work or government pensions.
The pullback in the equity markets through the end of last year gave investors a great opportunity to pick up some high-quality companies at very cheap prices. Those who had the foresight to buy in late December are already sitting on nice gains, but there are still deals to be found.
TD chalked up some pretty impressive numbers last year. Adjusted net income increased 15% to $12.2 billion and fiscal 2018 adjusted earnings per share rose 17% to $6.47. The company gets most of its profits from the Canadian operations, where earnings increased 10%, but the U.S. also makes a significant contribution, and profits south of the border rose an adjusted 30% compared to fiscal 2017.
Going forward, TD is targeting annual earnings growth of 7-10%. This is likely a conservative outlook given the track record in recent years and the fact that the Canadian and U.S. economies remain in good shape. The slowdown in rate hikes should help ease some of the pain in the housing market and reduce default risk in TD’s mortgage portfolio.
Provisions for credit losses remain stable across the board, and TD has limited direct exposure to the Canadian energy sector, which is starting to recover after a rough 2018.
TD has raised its dividend by a compound annual rate of 11% over the past two decades, and ongoing increases in step with earnings growth should be expected.
Investors who buy the stock today can pick up a yield of 3.6%. The shares are up from $66 in December to above $74 but still sit below the $80 mark they hit last September.
Suncor is somewhat unique in the energy patch in that it can do well whether oil prices are rising or in a downtrend.
The company has an integrated structure that includes oil production, refining, and marketing groups.
Downstream assets, including the refineries and the 1,500 Petro-Canada retail locations, provide a nice hedge when oil prices dip. Refining input costs fall in these circumstances, and depending on the spread between the feedstock cost and the market price for the finished product, the margins can be significant. In addition, lower oil prices tend to lead to falling gasoline prices, and that can result in more visits to the retail locations as people take more trips.
The recovery in oil prices in the past month should boost margins for the oil sands and offshore production segments. These areas have grown significantly in recent years due to large acquisitions and successful development projects, and rising output should continue.
Overall, Suncor is a good bet if you want long-term exposure to the oil sector while avoiding the risks associated with the pure-play producers. The company has a strong balance sheet and generates solid free cash flow to support ongoing dividend increases.
The stock has not rebounded as quickly as one might have expected on the recent gains in the oil market. At the time of writing, the share price is $43 compared to $55 last July. The current dividend yield is 3.3%.
Is one more attractive?
TD and Suncor are leaders in their sectors and should be strong buy-and-hold picks for a self-directed RRSP. The stocks still appear cheap, even after the January bounce, so I would probably split a new investment between the two TSX Index giants today.
Additional opportunities are worth watching in the Canadian market right now.
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Fool contributor Andrew Walker has no position in any stock mentioned.