Canadian investors are using their self-directed Registered Retirement Savings Plan (RRSP) to build savings that can complement a company pension, Canada Pension Plan, Old Age Security, and other retirement income.
The market correction in certain segments of the TSX is giving investors who missed the rally after the 2020 market crash a chance to buy great Canadian dividend stocks at discounted prices.
Power of compounding
Owning stocks comes with risks, as share prices can fall. However, top dividend-growth stocks generally rebound after a slump and buying dips can boost long-term total returns.
One popular RRSP investing strategy involves buying stocks with long track records of dividend growth and using the distributions to acquire new shares. The snowball effect is small at the beginning, but relatively modest initial investments can grow to be significant savings over time. This is particularly true when dividends rise steadily and the stock gradually moves higher.
Fortis
Fortis (TSX:FTS) is a Canadian utility company with $65 billion in assets located in Canada, the United States, and the Caribbean. The businesses include power-generation facilities, electricity transmission networks, and natural gas distribution utilities. Fortis gets 99% of its revenue from rate-regulated operations. This makes it relatively easy to predict revenue and cash flow.
Fortis grows through a combination of acquisitions and internal development projects. The current $22.3 billion capital program is expected to increase the rate base by an average of 6% annually over five years. Fortis plans to increase the dividend by at least 4% per year over this timeframe, supported by the revenue from the new assets that go into service. The board increased the payout in each of the past 49 years.
Fortis trades below $57 per share at the time of writing. The stock isn’t as cheap as it was last October at the bottom of the 2022 rout, but deserves to be on your radar and currently offers a solid 4% dividend yield.
Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) is Canada’s largest oil and natural gas company, with a current market capitalization of close to $80 billion.
Commodity stocks can be volatile, so you need to be able to stomach the wild rides and have the conviction to add to the position when things get ugly. The attraction of CNRL is the fact that the board has increased the dividend for 23 consecutive years with a compound annual dividend growth rate of better than 20% during that timeframe.
The company has a strong balance sheet that enables management to buy assets at bargain prices during downturns. The broad mix of oil and natural gas production provides a balanced revenue stream. When prices surge, as they did in 2021 and 2022, CNRL generates significant profits.
The board used the cash windfall in the past two years to pay down debt, buy back stock, and put more cash in the pockets of shareholders through multiple increases to the base dividend and a special bonus distribution of $1.50 per share last August.
At the time of writing, the stock trades near $72 compared to $88 at the 2022 high. Investors can now get a 5% dividend yield.
The bottom line on top RRSP stocks
Fortis and CNRL 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 watchlist.
