Retirement savers who still have TFSA contribution room open are wondering which stocks are now good to buy for their self-directed portfolios. One popular investing strategy for building retirement wealth involves buying top TSX dividend stocks and using the distributions to buy new shares.
TFSA investors saw their contribution limit increase by $6,000 in 2022. This brings the cumulative maximum total contribution space to $81,500.
TD Bank
TD (TSX:TD)(NYSE:TD) paid its first dividend in 1857. Investors have received a piece of the profits annually since that time and continue to see generous increases from the bank. In fact, TD raised the dividend by 13% for fiscal 2022 and has a compound annual dividend-growth rate of about 11% over the past 25 years.
Steady dividend increases are key to building long-term total returns on an investment. Each bump in the size of the payout boosts the yield on the original investment. In addition, companies that raise their dividends on a regular basis typically see their share prices increase over time.
TD faces some economic headwinds in the next 12-24 months. Economists and analysts are increasingly calling for a mild recession, as the Bank of Canada raises interest rates in an effort to cool off an overheated economy and reduce inflation. There is going to be a period where price increases remain high alongside rising borrowing costs. This one-two punch will hit businesses and consumers and could trigger an increase in loan defaults.
That being said, the selloff in TD’s stock price looks overdone. The bank has a strong capital position to ride out the downturn and remains very profitable. TD generated adjusted net income of $11.36 billion in the first nine months of fiscal 2022 compared to $10.78 billion last year.
Management is using a good chunk of the cash hoard built up over the past two years to make two strategic acquisitions in the United States. TD is buying First Horizon for US$13.4 billion in a move that will add 400 branches in the southeastern part of the United States. Another deal valued at US$1.3 billion will bring Cowen, an investment bank, into the TD family and boost TD’s capital markets operations. The two deals set TD up to drive long-term growth as the American economy expands. The purchase of First Horizon will make TD a top-six bank in the American market.
TD trades for $87 per share at the time of writing compared to the 12-month high around $109. Investors can now get a 4% dividend yield.
A $3,000 investment in TD stock 25 years ago would be worth about $54,000 today with the dividends reinvested.
Fortis
Fortis (TSX:FTS)(NYSE:FTS) is a good defensive stock to buy if you are concerned the anticipated recession could be deeper than expected. The company gets 99% of its revenue from regulated assets, including power generation, electricity transmission, and natural gas distribution businesses. These are essential services, and the revenue streams tends to be reliable and predictable.
Fortis grows through a combination of acquisitions and internal projects. The current $20 billion capital program will increase the rate base by about a third to more than $41 billion by the end of 2026. As revenue and cash flow increase, management intends to raise the dividend by an average annual rate of 6% through 2025. Investors should feel comfortable with the guidance. Fortis has increased the dividend in each of the past 48 years.
A $3,000 investment in Fortis stock 25 years ago would be worth about $51,000 today with the dividends reinvested.
The bottom line on top stocks to buy for TFSA total returns
TD and Fortis are good examples of top TSX stocks that have delivered solid returns for investors. There is no guarantee that these stocks will deliver the same results over the next 25 years, but the strategy of buying quality dividend stocks and using the distributions to acquire new shares is a proven one for building wealth. TD and Fortis look cheap right now and still deserve to be on your radar for a diversified TFSA retirement fund.
The TSX Index is home to many great dividend stocks that have generated similar or even better returns. Investors can take advantage of the market correction to buy these stocks at a discount for their retirement portfolios.
