Canadians use their self-directed Registered Retirement Savings Plan (RRSP) to build portfolios of investments that can provide retirement income to go along with company and government pensions. One popular RRSP investing strategy involves owning top TSX dividend stocks and using the distributions to buy new shares.
RRSP basics
A person’s annual RRSP contribution limit is 18% of earned income in the previous year, up to a maximum. The 2023 maximum contribution limit is $30,780. Unused space can be carried forward.
RRSP contributions reduce taxable income for the relevant tax year. This is a big benefit for investors who are in higher marginal tax brackets. In fact, it is common for people to build up RRSP room when they are in the early part of their careers, since there is less tax-reduction bang for your buck at lower income levels. Savings can be put into a Tax-Free Savings Account (TFSA) instead.
Contributions to company pension programs count toward the RRSP limit, so people with generous pension benefit programs at work need to keep an eye on how much RRSP space they actually have left each year. The CRA imposes a tax of 1% per month on contributions that exceed the personal RRSP limit by more than $2,000.
RRSP investments can grow tax-free while inside the account. Withdrawals are taxed as income. Normally, investors try to plan it so that they pull out the funds at a lower personal income tax rate in retirement than when they made the contributions while working.
Stocks, bonds, Guaranteed Investment Certificates (GICs), and some alternative investments can be held inside the RRSP.
GIC rates are now above 5% and deserve to be part of the mix to reduce risk. Top TSX dividend stocks, however, are still attractive with many trading at depressed levels and offering high yields.
Enbridge
Enbridge (TSX:ENB) raised the dividend in each of the past 28 years. The current $17 billion capital program should help drive revenue and cash flow growth to support ongoing dividend increases.
Enbridge is best known for its oil pipelines, but it also has natural gas transmission and storage assets, natural gas distribution utilities, and renewable power sites.
The share price is down over the past year, as investors unloaded energy infrastructure stocks on fears of a global recession and concerns that higher borrowing costs will hit cash available for dividends. At the time of writing, Enbridge trades near $49.50 compared to a high above $59 last year.
The pullback is probably overdone at this point, and investors can get a solid 7.2% dividend yield right now from ENB stock.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) raised its dividend when it reported fiscal second-quarter (Q2) 2023 earnings. This should mean the board is comfortable with the earnings outlook in the coming couple of years, even as the banks face some economic headwinds.
Rising interest rates help boost net interest margins for banks, but the steep increase in rates that occurred over the past 12 months is going to drive up loan losses. Bank of Nova Scotia is already boosting provisions for credit losses (PCL), but the overall loan book is solid at the bank should be able to ride out some tough times.
Bank of Nova Scotia has a capital position that is comfortably above the minimum required by the Canadian regulator. The diverse revenue stream in Canada and international markets helps hedge against issues in specific market segments.
BNS stock looks undervalued right now, trading near $67. It was above $90 in early 2022. Investors can now get a 6.3% dividend yield from the stock.
The bottom line on top dividend stocks for RRSP investors
Enbridge and Bank of Nova Scotia are good examples of top dividend stocks with attractive and growing distributions. Additional turbulence should be expected, but these stocks now appear oversold and offer a good shot at decent total returns for patient RRSP investors.
