Canadian savers are using their self-directed Registered Retirement Pension Plan (RRSP) contribution room to create portfolios of investments that will provide retirement income in addition to their work pensions and Canada Pension Plan and Old Age Security pensions.
Power of compounding
One popular RRSP investing strategy involves buying top TSX dividend stocks and using the distributions to acquire new shares. The technique harnesses the power of compounding and can turn relatively small initial investments into significant retirement savings over time.
Many stocks offer a dividend-reinvestment plan (DRIP) that automates the process, and the new shares purchased using the dividends are often provided at a discount to the market price. This can boost long-term total returns. Investors with online brokerage accounts can usually ask their provider to set up the DRIP.
Some RRSP investors prefer to take the dividends in cash and wait for market pullbacks to add to their holdings. If you actively manage your portfolio, this might be an option to consider.
Best stocks?
The best stocks to buy are not always the ones with the highest yields, but rather stocks that have good track records of dividend growth. Once in a while, you get a chance to acquire great dividend stocks that also offer above-average yields. In fact, the market correction that has occurred over the past year is driving up yields on top stocks, enabling investors to boost the return on their new investments.
The effect of the compounding process takes time to show meaningful results, but patient investors tend to be rewarded.
The same strategy can also be used with Guaranteed Investment Certificates (GICs). Most GICs offered by your online broker provide the option to compound the interest on multi-year terms. When GIC rates are high, it might make sense to choose this option instead of getting the interest paid monthly, semi-annually, or annually so that the annual interest payments reinvest at an attractive rate.
Best dividend stocks to buy?
Fortis (TSX:FTS) is a good example of a top TSX dividend stock that has delivered great total returns for RRSP investors.
The board has increased the dividend for 49 consecutive years and intends to boost the distribution by at least 4% annually through 2027. Fortis is working on a $22.3 billion capital program that will increase the rate base considerably to support dividend growth. Management has other projects under evaluation, and Fortis isn’t shy about making strategic acquisitions.
At the time of writing, FTS stock trades near $56 per share compared to the 2022 high of around $65. Investors who buy at the current level can get a 4% dividend yield.
Fortis offers a DRIP that gives investors a 2% discount on shares purchased using dividends.
The bottom line on RRSP investing
Stock prices can fall, and dividends sometimes get cut if a company gets into trouble. This is why it is important to look for top dividend-growth stocks like Fortis that have great track records of increasing their payouts. Over the long run, the share prices of high-quality, dividend-growth stocks tend to drift higher.
In the current environment, RRSP investors can use GICs and dividend-growth stocks to build funds with reasonable risk levels and generate decent returns on the invested money.
