A popular retirement benefit in Canada is the CPP, or Canada Pension Plan. This benefit aims to replace one-fourth of an individual’s pre-retirement income. However, CPP enhancements which began in 2019, allow Canadians to increase contributions toward the pension fund, which will increase future retirement payouts.
These enhancements will be phased out by 2025 and will replace a third of the contributor’s annual income. For those making enhanced contributions for 40 years, the pension amount will increase by 50%.
But the average CPP payout for a 65-year-old Canadian stands at a measly $811.2, which is not enough to lead a comfortable retired life. You can, however, increase your CPP payouts by 42% if you begin the pension plan at the age of 70.
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How to delay the CPP pension payout
One way to delay the CPP pension is by creating a passive-income stream. But how do you begin an income stream with a low amount of capital? Canadians can do so by investing in blue-chip dividend stocks such as Enbridge (TSX:ENB), which currently offers a dividend yield of 7.5%.
Enbridge operates a low-cost business model. Around 98% of cash flows are contracted, and 95% of customers are equipped with an investment-grade balance sheet. Further, 80% of EBITDA (earnings before interest, tax, depreciation, and amortization) are indexed to inflation, making the company immune to fluctuations in oil prices.
Enbridge’s adjusted EBITDA grew by 8% year over year in the first quarter (Q1) of 2023, despite a challenging macro-environment.
Enbridge estimates distributable cash flow per share to increase between $5.25 and $5.65 in 2023. Comparatively, it pays investors an annual dividend of $3.55 per share, indicating a payout ratio of 65%. A sustainable payout ratio allows Enbridge to lower balance sheet debt, reinvest in capital expenditures and increase payouts over time. Enbridge has increased its dividend at an annual rate of 10% in the last 28 years.
The energy giant aims to maintain debt-light financials with a leverage ratio between 4.5 and five times. It will also invest $17 billion in capital expenditures through 2025, expanding its base of cash-generating assets and driving future earnings higher. ENB stock is currently priced at a discount of over 20%, given consensus price target estimates.
Royal Bank of Canada stock
Another TSX heavyweight which pays investors a tasty dividend yield is Royal Bank of Canada (TSX:RY). Its annual dividend payout stands at $5.40 per share, indicating a yield of 4.4%. Despite the cyclical nature of the banking industry, RBC has increased dividends at an annual rate of 9.2% in the last 20 years.
In the Canadian market, RBC enjoys a top-two position across major product categories in Canada. It is also the largest mutual fund company in the country in terms of assets under management and the sixth-largest wealth advisory firm in the U.S.
RBC has a track record of earnings and dividend growth while maintaining a disciplined approach with regard to risk and cost management. It has a medium-term objective to generate a return on equity of 16%.
RBC is armed with a strong capital position and a highly liquid balance sheet with a payout ratio of less than 50%. Priced at 10 times forward earnings, RBC stock trades at a discount of 10% to price target estimates.
