A popular strategy for building retirement wealth involves buying top TSX dividend stocks and using the distributions to acquire new shares. The market correction that’s occurred over the past year is giving self-directed Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Plan (TFSA) investors a chance to acquire great Canadian dividend stocks at discounted prices.
Power of compounding
Investors who use dividend payments to buy new shares can harness the power of compounding to grow their savings. The impact is small in the beginning of the process, but over the course of decades, a modest initial investment can grow to become a substantial sum for retirement. This is particularly the case when dividends increase at a steady pace, and the share price moves higher over time.
Some companies even encourage investors to buy more shares with the dividends by giving investors a discount of up to 5% on the stock price. This is called a dividend-reinvestment plan (DRIP). Taking advantage of the discount can add a nice boost to total returns.
Fortis
Fortis (TSX:FTS) increased its dividend in each of the past 49 years, and the board plans to raise the distribution by at least 4% annually through 2027. The cash flow to support the dividend growth will come from the current $22.3 billion capital program that is expected to boost the rate base by an average of 6% per year over five years.
Fortis stock trades near $55 per share at the time of writing compared to a high of around $65 last year.
Buying dips tends to be a rewarding long-term move for Fortis shareholders, and the DRIP provides a 2% discount on stock purchased using the dividends. At the current price, Fortis provides a 4% dividend yield.
Enbridge
Enbridge (TSX:ENB) has increased the dividend in each of the past 28 years. The company does not currently offer investors a discount in its DRIP program, but investors get a generous dividend payout that should continue to grow.
Enbridge is working through a $17 billion capital program and has the financial clout to make strategic acquisitions to boost revenue and cash flow.
The legacy oil pipelines and natural gas transmission networks play integral roles in the smooth operation of the Canadian and U.S. economies. Public and government opposition to the construction of new major oil pipelines likely means the value of existing infrastructure should increase. Demand for oil and refined fuel is expected to remain robust for decades, even as the world transitions to renewable energy.
ENB stock trades near $48 per share at the time of writing compared to more than $59 at the peak last year. Investors who buy at the current level can get a 7.4% dividend yield. At this rate of return, the stock looks attractive, even if the share price never moves higher.
The bottom line on top dividend stocks to build wealth
Fortis and Enbridge pay attractive dividends that should continue to grow. If you have some cash to put work in a TFSA or RRSP, these stocks deserve to be on your radar.
