Canadian savers are using their Registered Retirement Savings Plan (RRSP) contributions to build self-directed portfolios of top TSX stocks that can provide extra income in retirement to go along with work pensions, Canada Pension Plan, and Old Age Security pension payments.
One popular RRSP investing strategy involves buying top TSX dividend stocks and using the distributions to acquire new shares to harness the power of compounding.
Canadian National Railway
CN (TSX:CNR) began trading as a public company in the mid-1990s. Since that time, investors have received a steady stream of dividend increases with a compound annual growth rate of about 15% through 2022. This is important to consider when evaluating dividend stocks for a buy-and-hold RRSP portfolio.
CN’s dividend yield is only about 2%, so investors might be inclined to take a pass on the stock, but the overall dividend growth is more important, and the lower yield is actually attributable to a steady increase in the share price over time.
CN currently trades for close to $161 per share. That’s up about 13% over the past 12 months. A look at the long-term chart gives investors a good appreciation of how the stock has performed.
CN plays a key role in the smooth operation of the Canadian and U.S. economies. The company has rail lines that connect the Pacific and Atlantic coasts in Canada with the Gulf Coast in the United States. CN transports everything from coal, crude oil, cars, and forestry products to grain, fertilizer, and finished goods. As the economy grows, so does demand for CN’s services.
The company has the ability to pass rising costs on to its customers. This is important in the current era of high inflation. Railways enjoy wide competitive moats. New tracks are unlikely to be built along existing routes and trucking companies can only viably compete for business on some segments.
Fortis (TSX:FTS) is a Canadian utility company with $65 billion in assets across Canada, the United States, and the Caribbean. The businesses produce power, transmit electricity, and distribute natural gas. Fortis gets 99% of its revenue from regulated assets. This means cash flow tends to be predictable and reliable.
Fortis stock has also trended higher over the years, supported by rising revenue from strategic acquisitions and internal development projects.
The board has increased the dividend in each of the past 49 years. That’s a great track record and a key reason investors have continued to drive up the share price over time.
The stock isn’t as cheap as it was during the pullback in the second half of last year, but Fortis still looks attractive today and offers a 3.9% dividend yield.
The bottom line on top stocks for RRSP investors
RRSP investments tend to be long-term positions that target total returns driven by rising dividends and higher share prices. Investors need to be patient during market corrections and can even take advantage of pullbacks to put new money to work in top dividend-growth stocks.
There is no guarantee that CN and Fortis will deliver the same returns for investors over the next 25 years, but these stocks deserve to be anchor positions in a self-directed RRSP and are good examples of how owning reliable dividend-growth stocks can help investors build retirement wealth.