TFSA All-Stars: Stocks That Could Set You Up for a Luxurious Retirement

These top TSX dividend stocks have helped make some investors quite rich.

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Canadian savers are using their self-directed Tax-Free Savings Account (TFSA) to build portfolios of top TSX stocks to help meet their retirement goals. One popular investing strategy involves buying great Canadian dividend stocks and using the distributions to acquire new shares.

Power of compounding

Many stocks have a dividend-reinvestment plan (DRIP) that offers discounts to investors who automatically buy new shares with their distributions instead of taking the cash. The company benefits by retaining cash flow that can be used to fund investments in growth initiatives. Investors get the new shares at a discount of up to 5%.

Each time the dividend is paid and new shares are acquired, the next dividend payout is larger, and even more shares can potentially be bought, depending on the movement of the share price. Over time, the effect is similar to rolling a snowball down a hill. Modest initial investments can turn into significant savings as the process picks up momentum. This is particularly true with stocks that raise their dividends regularly and have share prices that drift higher over the long term, largely due to the steady dividend growth.

Fortis

Fortis (TSX:FTS) raised its dividend in each of the past 49 years. That’s one of the best track records on the TSX, and investors should see the streak continue. Management is targeting average annual dividend growth of at least 4% through 2027 supported by the current $22.3 billion capital program.

Fortis owns $65 billion in utility assets, 99% of which are regulated businesses. These include power generation, electricity transmission, and natural gas distribution operations located in Canada, the United States, and the Caribbean.

Fortis stock trades near $56 at the time of writing compared to a high around $65 last year. Investors who buy the dip can get a 4% yield. Fortis has a DRIP in place that gives investors a 2% discount on shares purchased with the dividend payout.

Royal Bank

Royal Bank (TSX:RY) is Canada’s largest company with a current market capitalization near $175 billion. The bank is very profitable and continues to grow its Canadian and international business through acquisitions.

Royal Bank purchased Brewin Dolphin, a U.K. wealth management business, for $2.4 billion last year. The deal makes Royal Bank a top-three player in the wealth management sector in the United Kingdom and Ireland. At home, Royal Bank has an agreement in place to buy HSBC Canada for $13.5 billion. The deal is expected to close early next year and will add roughly 130 branches to the business.

Royal Bank recently raised the dividend, so management can’t be too concerned about the economic headwinds facing the banks. The company generated $3.8 billion in adjusted earnings in the fiscal second quarter (Q2) of 2023 and has a strong capital position to ride out market turbulence.

Royal Bank trades near $126 per share at the time of writing compared to nearly $140 earlier this year. Investors can now get a 4.3% dividend yield on the stock. Royal Bank is offering a 2% discount on shares purchased through its DRIP.

The bottom line on building TFSA retirement wealth

Fortis and Royal Bank are good examples of top TSX dividend stocks that have generated strong returns for patient investors who use the DRIP to grow the size of the portfolio. There is no guarantee the future returns will be the same, but these stocks deserve to be on your radar as anchor positions in a diversified portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

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