The primary goal for most investors is to build a nest egg for retirement. So, it’s essential to invest in asset classes that outpace inflation over time, allowing you to lead a comfortable life in retirement.
Typically, investors should make annual contributions to accounts such as the Registered Retirement Savings Plan (RRSP). Contributions to the RRSP will lower your tax bill, as individuals are taxed on these withdrawals during retirement.
How much is the average RRSP balance for 65-year-olds?
According to a report from Ratehub, the average RRSP balance for individuals over the age of 65 in Canada is $129,000. If we include the average TFSA (Tax-Free Savings Account) balance, the cumulative balance in the two accounts rises to $160,000, while the total average savings for 65-year-old retirees is $319,000. So, is this amount enough for Canadian retirees?
If the entire investment is held in GICs (Guaranteed Investment Certificates) that offer you a yield of 5%, retirees can earn $16,000 a year in interest, which is not enough to lead a comfortable life in retirement.
If we exclude rental expenses, the average monthly cost for an individual living in Toronto is more than $1,100. Now, it may seem that a $320,000 portfolio that yields $16,000 each year is enough, as the average monthly payout stands at $1,333. However, given that the cost of living is bound to increase due to inflation and interest rates may move lower in the next 12 months, it’s crucial to create a retirement portfolio of at least $500,000.
Investing in blue-chip dividend stocks is a strategy that can help you beat inflation and create a recurring income stream at a low cost. Canadians can consider holding dividend stocks such as Toronto-Dominion Bank (TSX:TD) in their TFSA or RRSPs right now and benefit from higher payouts in the upcoming decade.
Is TD stock undervalued?
TD is among the largest banks in North America. In the last two years, TD Bank stock has trailed the broader markets as rising interest rates have led to a tepid lending environment. As the cost of debt rises, TD Bank and its peers also have to account for higher delinquency rates, which leads to narrowing profit margins and lower earnings.
Down 30% from all-time highs, TD Bank stock offers a tasty dividend yield of 5.4%. Despite an uncertain macro environment, TD Bank increased earnings by 2% year over year to $3.8 billion in the fiscal second quarter (Q2) of 2024 (which ended in April).
Its wholesale business was a key driver of the bottom line as net income more than doubled to $441 million in Q2 due to higher trading-related revenue, underwriting fees, and lending revenue.
Bay Street expects TD Bank to increase adjusted earnings per share from $8 in fiscal 2023 to $8.07 in fiscal 2024 and $8.37 in fiscal 2025. Priced at less than 10 times forward earnings, TD Bank stock is quite cheap and trades at a discount of 14.6% to consensus price target estimates.
In addition to its attractive valuation, investors are also positioned to benefit from a growing dividend yield. In the last 20 years, TD Bank has raised its dividends by 7% annually, which is exceptional for a company that’s part of a cyclical sector.
