Are you looking to earn high total returns in your RRSP?
If so, dividend stocks may be great assets for you to consider owning. Such stocks provide regular cash income like bonds do, but they also have considerable capital appreciation potential. Most of the time, the taxable status of dividend stocks reduces their returns compared to non-dividend stocks (the latter are not taxable at all if you don’t sell). So, dividend stocks are, along with bonds, among those assets that benefit the most from the RRSP’s favourable tax treatment.
Deciding to hold dividend stocks in your RRSP could be a wise move. However, it is only half the battle. To actually invest in dividend stocks profitably, you first need to know which ones are worth owning. In this article I will explore two quality dividend stocks that have many desirable characteristics.
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Canadian Pacific
Canadian Pacific Kansas City Railway (TSX: CP) is a Canadian railroad stock. It recently gained the distinction of being the only North American railroad to link Canada, the U.S. and Mexico, when it bought the U.S.-based Kansas City Southern in 2023. The price paid for the deal was a little bit high, but now Kansas City tracks are part of CP’s tracks and the combined entity has a very wide map, spanning three countries. Also, Kansas City Southern is already producing good effects on CP’s earnings performance. In the trailing 12 month period, CP’s revenue jumped 49%, while most railroads saw their sales decline due to seasonal effects and a slowdown in crude by rail shipments.
Essentially, CP’s Kansas City Southern deal increased the amount of profit that the company earned dramatically. However, the company had to issue a lot of stock to pay for the deal, so earnings per share (“EPS”) only increased 4.5% in the trailing 12 month period. This is all part of the steep cost Canadian Pacific paid for Kansas City Southern. Still, any positive growth on a per share basis is better than what many other railroads were able to pull off in 2023.
Fortis
Fortis Inc (TSX: FTS) is a Canadian utility with operations in Canada, the U.S. and the Caribbean. It increased its dividend every year over the last 50 years. As a result, it is categorized as a “Dividend King,” a rare distinction among dividend stocks that only a handful of them can boast.
Fortis is a well-run utility that tends to chug along pretty well most of the time. It earns steady, predictable returns. It pays out a lot of dividend income. It operates regulated utilities, which are extremely resilient during recessions. Over the years, it has consistently outperformed both the TSX composite index and the TSX utilities sub-index. On the whole, it has a lot of potential.
Foolish takeaway
When it comes to total returns, holding TSX dividend stocks in RRSPs has been a winning strategy. Thanks to the RRSP’s tax-deferred nature, dividend stocks tend to benefit especially from being inside the account. Not just any randomly chosen high yield stock is necessarily a good pick. But shares in quality companies like the two named in this article tend to perform well over the long term.
