Time is money, and this is especially true when it comes to investing and the power of compounding. Those who start investing early in life retire wealthier than those who start later. If you start investing $1,000 a month now for the next 10 years and stay invested for another 10 years, you could have $295,000 by 2042. This calculation assumes you earn an average return of 6%. But if you start 10 years from now, you will have $165,000 by 2042. A 10-year delay costs your retirement portfolio $130,000. Hence, don’t waste time and lose money.
Building a retirement portfolio with an RRSP
Many investors are leery of the Registered Retirement Savings Plan (RRSP) because it locks your funds away until retirement. Any withdrawals other than for buying a home or investing in higher education include a withholding tax between 10% and 30%. But if you want to save your working income from tax, and don’t plan to touch this money until retirement, an RRSP is a great place to invest.
One benefit of the RRSP is that it lets you buy and sell stocks without any tax as long as you don’t withdraw the money. That adds to the power of compounding.
Here’s an example. Every year, John and Mary each invest $15,000 in similar stocks and earn an average return of 6%. The only difference is that John invests through an RRSP and Mary invests through a savings account. In the first year, they both sell $3,000 worth of stocks at a 15% profit of $450.
John can reinvest a $448 investment gain after deducting the brokerage cost, whereas Mary will have to bear the brokerage cost plus tax on the $450 gain before reinvesting the money. This will reduce her reinvestment amount to less than $400. An RRSP lets John keep the extra $45 reinvestment which can compound in the long term.
Two retirement stocks to buy through an RRSP
Now that you understand the power of compounding and what it can do for your retirement portfolio, here are two dividend stocks to consider for your RRSP.
Both stocks have more than a decade-long history of paying dividends which will continue for another decade.
BCE stock
This telecom giant is in a sweet spot, leading the 5G race. 5G is the fifth generation technology that reduces latency and offers broadband-like speed on mobile devices. Access to such fast internet speeds with very low latency opens up a new world of opportunities in artificial intelligence (AI) and the internet of things (IoT). The 5G infrastructure could connect millions of devices from drones to robots to autonomous cars with high-speed internet, enabling them to seamlessly perform AI tasks.
This will open up new subscription opportunities for BCE. Moreover, BCE will benefit from its competitor’s weaknesses. Rogers Communications faced two network outages in 15 months and is lagging behind the 5G investment. Plus, BCE has been growing dividends regularly since 2009, from a $1.54 dividend per share in 2009 to $3.63 in 2022, an average annual rate of 6.3%. BCE can maintain this growth by tapping the enormous 5G opportunity.
TC Energy stock
In 2020, many dividend stocks suspended their dividend reinvestment plan (DRIP), but TC Energy continues to offer it thanks to the resilience of its pipeline business. The DRIP reinvests the dividend amount to buy more shares of the same company. So even if you don’t invest regularly in the stock, DRIP does it for you. RRSP withdrawals are subject to taxation, and collecting cash dividends is inefficient if you have a high taxable income.
If you retire in the next 20-30 years, DRIP will grow your share count significantly. You can then convert DRIP to a dividend payment option and enjoy a higher passive income on more shares. By that time, your tax liability will be lower, and this amount can help you reduce the income gap, as government pensions cover only 30-33% of your average working income.
TC Energy shareholders benefit from the company’s 22-year history of growing dividends at an average annual rate of 7%. The stock that paid a $0.80 dividend per share in 2000 now pays a $3.6 dividend per share! In these 22 years, the stock price surged 526%. Thus, the DRIP gave shareholders the benefit of dividend growth and capital appreciation. To put this in perspective, a $20,000 investment in TC Energy in 2000 would have grown your portfolio to $105,200 in 2022, excluding the compounding effect of DRIP.
