Canadian savers with self-directed RRSP accounts are searching for top stocks to add to their portfolios ahead of the contribution deadline.
RRSP investing strategy
In an ideal situation, we would make regular cash contributions to the RRSP throughout the year and buy stocks accordingly. This averages out the cost of the shares and provides a chance to collect dividends early. The strategy also avoids the mad rush to contribute before the RRSP deadline.
Life isn’t that easy for everyone. Some people rely on year-end bonuses for their retirement investments. Others prefer to see where the cash situation falls after the holidays before making the commitment. The RRSP contribution deadline in 2021 for the 2020 tax year is March 1.
Contributions made to the RRSP reduce taxable income for the relevant tax year. This is particularly attractive for investors who find themselves in a higher marginal tax bracket. Investments inside the RRSP grow tax-free, but we pay tax on the funds at withdrawal. With a bit of careful planning, the cash is taken out when we are at a lower marginal tax rate than when we contributed the funds.
Top stocks for RRSP investors
A balanced portfolio is always recommended. RRSP investments tend to be buy-and-hold positions, so it makes sense to search for stocks that have long track records of dividend growth supported by rising revenue and earnings. Industry leaders tend to outperform over the long haul. Look for companies with wide competitive moats.
Buying stocks on a dip is always helpful, but trying to time the market is difficult. Waiting to invest in great companies often results in lost dividend payments or being left out of a surprise rally.
CN is a leader in the North American rail industry. The company generates revenue in both Canada and the United States. That gives investors a great opportunity to get exposure to U.S. economic growth through a Canadian business. CN’s network of roughly 20,000 route miles connects to three coasts. This is unique in the industry.
The company generates strong free cash flow and has one of the best dividend-growth records on the TSX Index over the past 25 years. CN raised the dividend by 7% for 2021.
A $5,000 investment in CN just 20 years ago would be worth about $98,000 today with the dividends reinvested.
Royal Bank is Canada’s largest financial institution by market capitalization and one of the top 15 in the world.
The bank gets revenue from several segments that include personal banking, commercial banking, wealth management, capital markets, insurance, and investor and treasury services.
Royal Bank shareholders have received steady dividend payments for more than a century. Government regulations forced the bank to put its regular dividend increase on hold during the pandemic, but the restrictions should lift by the end of the year.
Royal Bank has significant cash to deploy. When the banks get the green light to raise payouts, investors could see a big increase. Royal Bank might also use its cash position to make a strategic acquisition.
A $5,000 investment in Royal Bank 20 years ago would be worth about $90,000 today with the dividends reinvested.
The bottom line on RRSP investing
Buying top dividend stocks and using the payouts to acquire new shares is a proven strategy to build RRSP wealth. CN and Royal Bank are industry leaders and should be top picks for a diversified RRSP portfolio.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway. Fool contributor Andrew Walker owns shares of Canadian National Railway.