A popular strategy for building wealth inside a self-directed Registered Retirement Savings Plan (RRSP) involves buying top dividend-growth stocks and using the distributions to acquire new shares. Investors can currently find good TSX dividend stocks trading at discounted prices that offer attractive dividend yields.
Power of compounding
Everyone knows how to turn a snowball into a snow boulder when making a snowman. The same compounding effect can be used to build a retirement fund by owning good dividend stocks and reinvesting the payouts into new shares. Every time more shares are added to the holding, the size of the next dividend payment increases. Depending on the movement of the share price, this can buy even more shares, which boosts the payout again on the next distribution. The impact is small in the beginning, but over the course of two or three decades, the results can be significant, especially when the dividend rises and the share price drifts higher.
Many companies offer a dividend-reinvestment plan (DRIP) that gives investors a small discount on the price of the shares acquired using the dividend payment. They do this to entice investors to reinvest in the business instead of taking the payment in cash. The money that isn’t paid out can be used by the company to invest in growth initiatives.
Fortis
Fortis (TSX:FTS) is a Canadian utility company with $66 billion in assets spread out across Canada, the United States, and the Caribbean. The businesses include power-generation facilities, electric transmission networks and natural gas utilities that produce reliable rate-regulated revenue streams.
Fortis trades near $54 per share right now compared to $61 in May last year. The pullback is primarily due to high interest rates. Fortis uses debt to fund part of its growth program, so elevated borrowing costs eat into profits.
Interest rates will likely come down in the second half of 2024 or in the first part of next year. Fortis still expects its capital program to drive enough cash flow growth to support planned annual dividend increases of 4-6% through 2028. The board has increased the dividend in each of the past 50 years.
Investors who buy FTS stock at the current level can get a 4.4% dividend yield. The company’s DRIP offers a 2% discount on the share price.
TC Energy
TC Energy (TSX:TRP) trades for close to $49 at the time of writing. It was as high as $74 in 2022. Elevated interest rates are largely responsible for the decline in the stock for the same reasons as Fortis. TC Energy grows by building large energy infrastructure assets that often cost billions of dollars and can take years to complete. The jump in borrowing costs cuts into profits and can reduce cash available for additional investments or distributions.
Despite the headwinds, TC Energy delivered solid results in 2023 and expects the capital program to support ongoing annual dividend increases of 3-5% per year. The board has increased the payout annually for more than two decades.
TRP stock currently provides a dividend yield of 7.8%.
The bottom line on top RRSP stocks
Fortis and TC Energy are good examples of top TSX dividend-growth stocks that now trade at discounted prices. If you have some cash to put to work in a self-directed RRSP, these stocks deserve to be on your radar.
