Canadian investors are using their self-directed Registered Retirement Savings Plan (RRSP) to build portfolios of funds that can supplement other pension income when they decide to quit work.
A popular RRSP investing strategy involves buying top TSX dividend stocks and using the distributions to acquire new shares. This sets off a powerful compounding process that can turn relatively small initial investments into significant savings over time.
TD Bank
TD Bank (TSX:TD) has a strong track record of dividend growth. In fact, the compound annual dividend growth rate over the past 25 years is better than 10%. This kind of reliable distribution expansion tends to support upward drift in the share price over the long haul.
The challenge for investors is to have the patience to ride out dips and take advantage of meaningful pullbacks to add more TD stock to their portfolios. The recent slide in the share price might be setting up another great buying opportunity.
TD is a very profitable bank. The business generated adjusted net income of $3.75 billion in the fiscal third quarter (Q3) 2023, up slightly from the same period last year. The stock is down, however, due to the broader negative sentiment in the bank sector and TD’s revelation that it will not meet its earnings growth target of 7-10% this year. This is largely due to the decision to end its planned takeover of First Horizon for US$13.4 billion.
TD is now sitting on a mountain of excess cash. For the moment, the extra capital is a drag on earnings growth, but it also gives TD a lot of flexibility and positions the firm very well to ride out a recession.
Investors who buy TD stock at the current price near $79 can pick up a dividend yield of 4.85% and simply wait for the sector to recover.
BCE
BCE (TSX:BCE) is Canada’s largest communications company with a current market capitalization of about $56 billion. Dividend investors seeking passive income buy the stock for its reliable and generous distributions.
High interest rates are pushing up debt costs and a recession could put a meaningful dent in ad revenues for BCE’s media business. However, the bread-and-butter mobile and internet subscription revenues should hold up well during an economic downturn to help BCE ride out the turbulence.
Management expects revenue and free cash flow to grow in 2023 compared to last year. As a result, investors should see another decent dividend increase for 2024. BCE raised the payout by at least 5% in each of the past 15 years.
At the current share price near $61, the stock provides a 6.3% dividend yield.
The bottom line on top stocks for RRSP investors
TD and BCE pay attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed RRSP, these stocks deserve to be on your radar.
