Canadian RRSP investors are searching for top dividend stocks that also offer opportunity for attractive capital gains in the coming years.
Power of compounding and total return
Savvy RRSP investors have known for decades that using dividends to buy new shares can greatly increase the total returns on retirement investments over the long haul. Using a company’s dividend-reinvestment plan (DRIP) enables the distributions to acquire news shares without a fee. In some cases, the company offers investors a discount as high as 5% on the purchase of the new stock.
Like a snowball rolling down a mountain, the reinvested dividends kick off a compounding process that can turn small initial investments into large holdings after 20 or 30 years. This is particularly true with stocks that steadily increase their payouts and are rewarded with higher share prices.
Fortis
Fortis (TSX: FTS)(NYSE: FTS) is one of Canada’s top dividend-growth stocks. In fact, the board raised the payout in each of the past 48 years and has provided guidance for average annual dividend increases of 6% through 2025.
The power generation, electric transmission, and natural gas distribution utility has $57 billion in assets across Canada, the United States, and the Caribbean. Nearly all of the revenue comes from regulated businesses, so cash flow tends to be predictable and reliable.
Fortis grows through a combination of strategic acquisitions and development projects. The last large deal was the US$11.3 billion purchase of ITC Holdings, a Michigan-based electric transmission company. Fortis is currently focused on completing its $20 billion capital program that includes $3.8 billion in clean energy investments. Smaller projects make up 85% of the portfolio. This reduces risks and makes it easier for Fortis to deliver on its growth targets.
As a result, investors will see the rate base expand from $31.2 billion in 2021 to $41.6 billion in 2026. This should support steady dividend growth. The current dividend provides an annualized yield of 3.8%.
A $10,000 investment in Fortis 25 years ago would be worth about $175,000 today with the dividends reinvested.
Bank of Montreal
Bank of Montreal (TSX: BMO)(NYSE: BMO) paid its first dividend in 1829 and has given investors a piece of the profits every year since that time. The bank is currently Canada’s fourth-largest by market capitalization.
Bank of Montreal has a balanced revenue stream that comes from personal and commercial banking, capital markets, and wealth management operations. The bank has a large U.S. business primarily located in the Midwest states. This group has grown since the 1980s through acquisitions, and more deals could be on the way. Bank of Montreal is sitting on excess cash and the Canadian dollar has strengthened against the American currency.
The Canadian government just removed a pandemic ban on bank dividend hikes and share buybacks. Bank of Montreal will likely announce a large dividend increase when it reports fiscal Q4 2021 earnings on December 3.
Investors who buy now can pick up a 3% dividend yield. A $10,000 investment in Bank of Montreal 25 years ago would be worth about $170,000 today with the dividends reinvested.
The bottom line on top RRSP stocks for total returns
Fortis and Bank of Montreal are top quality dividend stocks that have delivered solid total returns for buy-and-hold RRSP investors. If you have some cash to put to work in a self-directed RRSP, these stocks deserve to be on your radar.
