The Registered Retirement Savings Plan (RRSP) was introduced in 1957, following the legislation allowing tax deferral for Canadians saving money for the future. In 2023, 66 years later, the RRSP remains one of the country’s top retirement accounts. You can contribute 18% of your previous year’s income but not exceed the fixed contribution limit ($30,780 in 2023).
There’s no competition with the younger Tax-Free Savings Account (TFSA), because each one has attractive features not present in the other. The RRSP has two main advantages. First is that money growth in the retirement and investment vehicle compounds on a tax-deferred basis until it’s withdrawn. Second, and equally favourable, users can deduct RRSP contributions from their taxable income.
Because of the distinct features, you can turn your RRSP into a passive-income juggernaut. You can hold income-producing assets like dividend stocks to realize the incredible benefits. The ideal holdings in an RRSP to ensure uninterrupted capital growth are blue-chip stocks like Royal Bank of Canada (TSX:RY) and Enbridge (TSX:ENB).
You can’t go wrong with the big bank stock, the most valuable TSX company based on market capitalization ($154.88 billion). The energy stock is a sector heavyweight and the fourth-largest publicly listed Canadian company ($92.74 billion). With an average dividend yield of 6.5%, you can build a substantial nest egg and live off dividends when you retire.
Giant lender
RBC has endured countless economic downturns, recessions, and financial crises since commencing operation in 1864. The bank started paying dividends in 1870, and the practice continues to the present (153 years dividend track record). If you invest today, the share price is $111.01, while the dividend yield is 4.86%.
The giant lender raised its provision for credit losses (PCL) by 81% to $616 million in the third quarter (Q3) of fiscal 2023 versus Q3 fiscal 2022.
Nonetheless, net income increased 8.2% year over year to $3.87 billion. “Despite a complex operating environment, our Q3 results exemplify RBC’s ability to consistently deliver solid revenue and volume growth underpinned by prudent risk management,” said RBC’s president and chief executive officer (CEO), Dave McKay.
McKay added that the bank leverages its strong balance sheet and diversified business model to support growth and bring long-term shareholder value. Unfortunately, RBC plans to reduce its full-time equivalent (FTE) employees by 1-2% in Q4 2023 as part of its cost-reduction strategy. The bank will offer severance packages.
A no-brainer RRSP holding
A high-yield dividend aristocrat like Enbridge is a no-brainer holding in an RRSP. The top-tier energy stock pipeline has raised its dividends for 27 consecutive years. At $43.63 per share, you can partake in the hefty 8.14% dividend.
Enbridge recently signed a US$14 billion cash-and-debt deal to purchase the assets of Dominion Energy in the United States. Canada’s energy infrastructure titan already has four core franchises that deliver steady growth. The strategic acquisitions of three American utility companies will double the scale of its gas utility business.
Take advantage of the deadline
The RRSP deadline for 2023 is February 29, 2024. You can contribute 18% of your income, or up to $30,780, before the date to lower your taxable income. On the investment aspect, an equal allocation of $15,390 in RBC and Enbridge will generate $500.18 in quarterly passive income.
