New investors are wondering how they can put hard-earned savings to work in a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) to create funds to enable a comfortable retirement. One popular strategy for building long-term wealth involves buying top TSX dividend stocks and using the distributions to acquire new shares.
Power of compounding
Each time a dividend is used to buy shares under a company’s dividend-reinvestment plan (DRIP) the next dividend payment is larger. This, in turn, can purchase even more shares depending on the movement of the share price. The compounding effect is small at the beginning, but over the course of 20 or 30 years, investors can turn a relatively small initial investment into a meaningful retirement fund. This is particularly true when dividends increase at a regular pace and the share price trends are higher.
Fortis
Fortis (TSX:FTS) has increased its dividend for 50 consecutive years. That’s the kind of stock buy-and-hold investors should look for when starting a retirement portfolio.
Fortis owns $64 billion in utility assets spread out across Canada, the United States, and the Caribbean. The businesses include power-generation facilities, natural gas distribution utilities and electric transmission networks. Nearly all of the revenue comes from rate-regulated assets, so the cash flow stream should be reliable and predictable.
Fortis is working on a $25 billion capital program that is expected to support planned annual dividend increases of at least 4% through 2028. The current dividend yield is 4.3%.
Enbridge
Enbridge (TSX:ENB) is on track to achieve its 2023 financial goals and expects to generate revenue and cash flow growth in 2024. Based on this, the board just announced a 3.1% dividend increase for next year. This is the 29th consecutive annual dividend increase.
Enbridge has a $24 billion capital program and recently announced a US$14 billion deal to acquire three natural gas utilities in the United States. ENB stock trades near $47 at the time of writing compared to $59 at the high point last year.
Investors who buy the dip can get a 7.7% dividend yield. Even if the share price remains near the current level, the return is attractive.
BCE
BCE (TSX:BCE) has increased its dividend by at least 5% in each of the past 15 years. The stock’s drop from the 2022 high looks overdone, considering the essential nature of the core mobile and internet subscription businesses and BCE’s solid competitive position in the Canadian communications sector. At the time of writing, BCE stock offers a 7.25% yield.
TC Energy
TC Energy (TSX:TRP) plans to spin off the oil pipelines business next year to unlock value and raise capital to pursue the growth program. The company is best known as a natural gas transmission and storage player, with more than 90,000 km of natural gas pipelines and 650 billion cubic feet of natural gas storage capacity. Global natural gas demand is expected to be strong in the coming years. The fuel emits less carbon dioxide than oil or coal when burned to produce electricity. Gas-fired power stations will be important sources of energy to back up renewables that have limitations.
TC Energy has increased its dividend annually for more than two decades. The board intends to boost the payout by at least 3% per year over the medium term. At the current share price, TRP stock provides a 7.4% dividend yield.
Bank of Montreal
Bank of Montreal (TSX:BMO) paid its first dividend in 1829 and has given investors a cut of the profits every year since that time.
The bank closed its US$16.3 billion acquisition of Bank of the West in the United States in early 2023, right before the meltdown in the share prices of American regional banks. The drop in BMO’s stock price from a high above $150 last year to the recent low near $102 partly reflects concerns from investors that the bank might have overpaid for Bank of the West. That could be the case, but investors should still see long-term benefits from the deal.
At the current price near $110, Bank of Montreal provides a 5.3% dividend yield.
The bottom line
Fortis, Enbridge, BCE, TC Energy, and Bank of Montreal pay attractive dividends that should continue to grow. If you have some cash to put to work in a new retirement portfolio, these stocks look cheap and deserve to be on your radar.
