Canadian savers are searching for ways to build Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) wealth that can provide adequate retirement income. One popular investing strategy involves buying top dividend stocks and using the payouts to buy new shares.
Power of compounding
Time is the greatest asset an investor has when it comes to building retirement wealth. In fact, small initial investments in quality dividend-growth stocks can become significant piles of savings when the distributions are reinvested in new shares.
Many companies have dividend-reinvestment plans (DRIPs) that enable the dividends to automatically buy more stock at no trading charge and often at a discount to the market price of the shares.
Each new share added to the portfolio generates more dividends on the next payout. Over time, the snowball effect can be impressive. This is particularly true when the company raises the dividend regularly and the share price trends higher.
TD Bank
TD (TSX: TD) has a great track record of dividend growth. In fact, the bank has raised the dividend by a compound annual rate of better than 10% for the past 25 years. Investors received a 13% dividend increase for fiscal 2022. Another generous hike is likely on the way for fiscal 2023, even as the economy heads for some challenging times.
TD earned $3.8 billion in adjusted net income in the fiscal third quarter (Q3) 2022 compared to $3.6 billion in the same period last year. For the first three quarters of fiscal 2022, adjusted net earnings came in at $11.4 billion compared to $10.8 billion over the same period time 2021.
Despite the solid performance, TD stock is down to $87 compared to $109 in the early months of this year. The pullback appears overdone, and investors have a chance to buy TD at an attractive price and can now pick up a 4% dividend yield.
A $7,500 investment in TD stock 25 years ago would be worth nearly $120,000 today with the dividends reinvested.
BCE
BCE (TSX: BCE) has always been a top pick among retirees and other investors seeking passive income due to its generous dividends and reliable income stream. The stock, however, has also delivered great total returns for investors who use the dividends to buy new shares.
A $7,500 investment in BCE stock 25 years ago would be worth about $127,000 today with the dividends reinvested.
BCE is a leader in the Canadian communications sector and has successfully transitioned from being a landline telephone company to a mobile, internet, and media giant. Management continues to invest billions of dollars every year in new technology and network upgrades to drive ongoing revenue growth while protecting the strong competitive advantages the company enjoys in the Canadian market.
BCE trades for less than $60 at the time of writing compared to a high of $74 in the spring. The stock appears cheap at the current price and offers a 6% dividend yield.
The bottom line on top stocks to buy for total returns
TD and BCE are just two examples of how investors can harness the power of compounding to build retirement wealth. There is no guarantee these stocks will generate the same returns in the future, but TD and BCE still deserve to be core holdings in a diversified portfolio of top TSX dividend stocks.
