Investors building retirement funds in their Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) can take advantage of the market correction to buy top dividend stocks at undervalued prices.
One popular strategy for creating long-term wealth involves owning a diversified portfolio of high-quality dividend stocks and using the distributions to buy new shares. This takes advantage of a powerful compounding process that can turn modest initial investments into large sums over time.
TD Bank
TD (TSX:TD) is a good stock to buy for dividend growth and total returns. The board raised the dividend by 13% for fiscal 2022, and investors have enjoyed an average compound annual dividend-growth rate of better than 10% for nearly three decades.
TD built up a war chest of excess cash during the pandemic. The company is using the funds to make two strategic acquisitions in the United States to drive future revenue and profit growth. TD’s purchase of First Horizon for US$13.4 billion will add more than 400 branches to the existing American operations and will make TD a top-six bank in the United States. This should give it the scale it needs to effectively compete in the U.S. market.
TD is also buying Cowen, an investment bank, for US$1.3 billion.
TD stock trades near $88 at the time of writing compared to $109 net the beginning of the year. Rising interest rates designed to cool off the economy could trigger job losses and a recession next year. This would extend the pullback in the housing market and lead to slower loan growth at the banks.
A deep and long recession would be negative for TD and its peers, but the current outlook is for a mild and short recession. Assuming that’s how the situation will unfold, TD stock now appears undervalued.
Investors who buy at the current level can get a 4% yield.
Long-term investors have done well with TD stock. A $10,000 investment in the shares 25 years ago would be worth about $160,000 today with the dividends reinvested.
Emera
Emera (TSX:EMA) is a Canadian utility company based in Nova Scotia with $36 billion in electricity generation, transmission, and distribution and natural gas transmission and distribution assets located in Canada, the United States, and the Caribbean.
Adjusted net income in the first half of 2022 came in at $398 million, or $1.51 per share, compared to $380 million, or $1.49 per share, in the same period last year. The steady results point to the quality of the assets that provide regulated essential services. Revenue and cash flow should hold up well during a recession.
Emera recently raised the dividend to an annualized rate of $2.76 per share from $2.65 and says it is on track to boost the distribution by 4-5% per year through 2025. The current dividend yield is 5.5%.
Emera stock appears undervalued at $50 per share. It was above $60 in September. Investors sold the stock amid fears of soaring repair costs after the recent storm. A potential cap on rate increases in Nova Scotia is also making investors nervous. Despite the near-term uncertainty, the stock now looks oversold.
A $10,000 investment in Emera 25 years ago would be worth about $105,000 today with the dividends reinvested.
The bottom line on top stocks to build retirement wealth
TD and Emera are good examples of dividend stocks that can generate attractive long-term total returns for patient investors.
The strategy of owning a balanced portfolio of dividend stocks and using the distributions to buy more shares is a proven one for building retirement wealth, and these stocks should be solid picks at their current prices.
