The market correction is tough to watch, but it also gives buy-and-hold investors a chance to pick up top TSX dividend stocks at discounted prices for a self-directed Registered Retirement Savings Plan (RRSP) portfolio.
Canadians use RRSP investments as part of their overall strategy for building savings for their golden years. Contributions limits are set at 18% of a person’s earned income in the previous year up to a maximum amount. That’s $30,780 for the 2023 tax year.
RRSP contributions reduce taxable income for the relevant year. Investments grow tax free inside the RRSP, but the funds are taxed when withdrawn. The goal, if possible, is to remove the funds from the RRSP in retirement at a lower marginal tax bracket than when they were contributed.
Saving RRSP contribution room for years when your income is higher offers the best bang for your RRSP buck. One important point to remember is that contributions to a company pension reduce the RRSP limit for the year. Generous company pension plans can wipe out a large part of a person’s annual RRSP limit. Contributing too much can lead to a penalty.
Power of compounding
A popular investing strategy for building RRSP wealth involves buying to TSX dividend stocks and using the distributions to acquire new shares. This sets off a compounding process that can turn relatively modest initial investments into a nice nest egg over time, especially when dividends increase at a steady pace and the share price drifts higher.
Fortis (TSX:FTS) increased its dividend in each of the past 49 years. The board intends to raise the payout annually by 4-6% through at least 2027, supported by the current $22.3 billion capital program.
Fortis gets 99% of its revenue from rate-regulated utility assets that include power-generation stations, electricity transmission networks, and natural gas distribution utilities. These tend to deliver reliable revenue streams in all economic conditions, so Fortis should be a good stock to own during a recession.
Fortis trades near $55.50 at the time of writing compared to nearly $65 at the peak last year. Investors who buy the dip can get a 4% dividend yield.
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BCE (TSX:BCE) is popular with retirees seeking steady passive income due to its generous and reliable dividend. The stock has also been a good candidate for RRSP investors seeking to build long-term wealth.
BCE raised the dividend by at least 5% in each of the past 15 years. The core revenue stream provides commercial and residential clients with essential mobile and internet services. BCE has the power to raise prices when it needs extra cash to cover higher expenses. In addition, BCE has the balance sheet strength to invest the billions of dollars needed to protect its competitive moat.
BCE stock trades near $58.50 at the time of writing compared to more than $73 in April last year. Higher debt costs and weaker media revenue will put a squeeze on profits this year, but BCE expects total revenue and free cash flow to increase compared to 2022.
Investors who buy the pullback can now receive a 6.6% yield on the stock.
The bottom line on top RRSP stocks
Fortis 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.