RRSP Investors: 2 Great Dividend Stocks to Buy for Total Returns

These top TSX dividend stocks have increased their payouts annually for decades.

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Canadian investors with some cash to put to work inside a self-directed Registered Retirement Savings Plan (RRSP) are wondering which top TSX dividend stocks are still undervalued and good to buy today.

Buying stocks when they are out of favour is a contrarian strategy, but it can pay off over the long haul through higher dividend yields and potential capital gains, especially when distributions are used to buy new shares.

Power of compounding

RRSP investments tend to be long term in nature. One popular strategy for building RRSP wealth involves owning top dividend-growth stocks and using the dividends to acquire new shares. Each time a dividend payment is used to buy additional shares, the next payout is larger and can potentially acquire even more stock, depending on the movement of the share price. The compounding effect is slow at the start, but the impact over 20 or 30 years can be significant, especially when dividends rise and the share price drifts higher. It’s a bit like slowly rolling a snowball to make a snow boulder.

The best stocks to buy tend to be ones that have long track records of dividend growth.

Fortis

Fortis (TSX:FTS) raised its dividend in each of the past 50 years. That’s the kind of dividend-growth reliability investors should seek out when building RRSP portfolios focused on total returns.

Fortis stock is down about 10% over the past 12 months and currently trades below $53 per share. The pullback is largely due to high interest rates in Canada and the United States.

Fortis uses debt to fund part of its growth initiatives. Higher borrowing costs eat into profits and can reduce the amount of cash that is available for distributions. The Bank of Canada and the U.S. Federal Reserve are probably done raising interest rates, and many economists expect the central banks to start reducing rates in the second half of this year in order to avoid pushing the economy into a recession. Rate cuts should be positive for Fortis stock.

Fortis has a $25 billion capital program on the go that will drive up the rate base by about 6% per year through 2028. The resulting boost to cash flow should support a planned dividend increase of 4-6% per year. Fortis has other projects under consideration that could be added to the capital plan. The company also has a strong track record of making strategic acquisitions.

Investors who buy Fortis stock at the current level can get a 4.5% dividend yield. Fortis offers a 2% discount on shares purchased using dividends through the dividend-reinvestment plan (DRIP).

Enbridge

Enbridge (TSX:ENB) increased its dividend by 3.1% for 2024. This is the 29th consecutive annual hike to the distribution.

Enbridge is a giant in the North American energy infrastructure industry. The company’s oil pipelines move 30% of the oil produced in Canada and the United States. On the natural gas side, Enbridge’s transmission network carries 20% of the natural gas used in the United States. The company’s recent US$14 billion purchase of three American natural gas utilities will make Enbridge the largest natural gas utility operator in North America.

The company’s assets are strategically important for the smooth operation of the Canadian and American economies. Getting new large pipeline projects approved and completed is very difficult these days. As a result, the value of the existing infrastructure should increase over time. Demand for oil and natural gas continues to increase, even as the world transitions to renewable power.

Enbridge has a growing renewable energy group, so it is also positioned to benefit from the expansion of wind and solar projects.

Enbridge trades near $48 per share at the time of writing. The stock was as high as $59 in 2022. Investors who buy at the current level can get a 7.6% dividend yield.

The bottom line on top RRSP dividend stocks

Fortis and Enbridge pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks look cheap today and deserve to be on your radar.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Enbridge and Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Enbridge.

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