Canadian savers use their self-directed Registered Retirement Savings Plan (RRSP) to build portfolios of investments that will provide retirement income to go along with the Canada Pension Plan, Old Age Security, and company pensions.
One popular strategy for building RRSP wealth involves owning top TSX dividend stocks and using the distributions to acquire new shares through a company’s dividend-reinvestment plan (DRIP).
Power of compounding
Each time a dividend payment is used to buy additional shares, the size of the next dividend payment increases. Over time, the snowball effect of this process can turn relatively small initial investments into a meaningful retirement fund. This is particularly the case when the dividend increases at a steady pace and the share price drifts higher.
Many companies give investors a discount on the shares purchased through a DRIP. The reason is that keeping more cash inside the business strengthens the balance sheet and provides funding that can be used for growth programs. DRIP discounts are typically around 2% but can be as high as 5% in some cases.
Fortis
Fortis (TSX:FTS) raised its dividend in each of the past 50 years. The Canadian utility company operates $68 billion in assets across Canada, the United States, and the Caribbean. Businesses are primarily rate-regulated and include power generation, electric transmission, and natural gas distribution. Fortis trades for close to $54.75 at the time of writing. The stock is up about 10% from the 12-month low but is still way off the $64 it fetched two years ago, so there is decent upside potential.
Fortis is working on a $25 billion capital program that is expected to expand the rate base from a mid-year level of $37 billion in 2023 to $49.4 billion in 2028. The resulting growth in cash flow should support targeted annual dividend increases of 4-6% over that timeframe.
Fortis currently provides a 4.3% dividend yield and offers a 2% discount through the DRIP. Long-term RRSP investors have done well owning Fortis. A $10,000 investment in FTS stock 25 years ago would be worth about $164,000 today with the dividends reinvested.
Telus
Telus (TSX:T) has increased its dividend annually for more than two decades. The stock pulled back considerably over the past two years, primarily due to the impact of higher interest rates, but the decline appears overdone.
In its battle to get inflation under control the Bank of Canada aggressively increased interest rates in 2022 and 2023. Inflation for April 2024 came in at 2.7%, which is within the central bank’s 2-3% target, so the strategy is working. Economists broadly expect the Bank of Canada to start reducing interest rates in the second half of 2024 in order to avoid driving the economy into a recession.
Telus uses debt to fund part of its capital program. Higher borrowing expenses cut into profits and can reduce cash available for dividends. A drop in interest rates could bring investors back into the stock. In the meantime, investors who buy Telus at the current share price can get a 6.95% dividend yield. The stock trades near $22.40 at the time of writing compared to more than $30 two years ago.
A $10,000 investment in Telus 25 years ago would be worth about about $70,000 today with the dividends reinvested.
The bottom line on top RRSP dividend stocks
Fortis and Telus are good examples of top TSX dividend stocks that have long track records of distribution growth. There is no guarantee the returns will be the same over the next 25 years, but these stocks look attractive at their current prices and deserve to be on your radar for a diversified RRSP portfolio.
