If you say you are comfortable retiring at the income you earn today, ensure your passive income grows with inflation. An average retired Canadian has a median annual income of $37,100. They earn $21,100 of this amount from a Registered Retirement Savings Plan (RRSP) and other non-government pensions. This is the data from Statistics Canada for the year 2019. Considering periods of high inflation during 2021–22, this income would be insufficient. The stock market has something for everyone. You should invest in stocks that match your investment objective.
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What should RRSP investors look for in a dividend stock?
If you have less than five years to retire, you should consider investing in high-yield dividend stocks that grow dividends annually by at least 3% to beat inflation.
I compared high-yield stocks with high-dividend growth stocks. The effect of compounding to kick in could take around five years. The larger the gap in dividend yield, the more time it takes for a high-yield and high-dividend growth stock to reach parity.
Let’s understand this with the help of an example. I took Telus Corporation (TSX:T), with a dividend compounded annual growth rate (CAGR) of 6%. The stock is growing dividends by 7%, but I took a 6% dividend CAGR, assuming the growth slows. T has a yield of 7.3%. Another stock to consider is Timbercreek Financial (TSX:TF), which has a high yield of 9.2% and no dividend growth.
| Stock | Dividend Yield | Current Share Price | Share Count | Total Dividend in 2024 | Dividend CAGR | Total Share Count (DRIP) in 2034 | Total Dividend in 2034 |
| Telus Corporation | 7.34% | $21.21 | 471 | $183.27 | 6% | 834.8 | $2,332.22 |
| Timbercreek Financial | 9.20% | $7.50 | 1333 | $383.24 | 0% | 2606 | $1,781.08 |
A $10,000 investment in each of the two stocks will give you $183 (Telus) and $383 (Timbercreek Financial) in dividends, respectively, for the remainder of 2024. If you opt for a dividend reinvestment plan (DRIP), the dividend would compound to $2,332 and $1,781, respectively, as the effect of compounding kicks in.
How will the two stocks grow dividends in an RRSP?
A $10,000 investment in the above two stocks will grow your dividends in the following manner under a DRIP. These figures could change if the company changes its dividends per share or if there is a notable change in stock price.
| Year | TF dividend | Telus dividend |
| 2024 | $383.2 | $183.3 |
| 2025 | $947.6 | $788.9 |
| 2026 | $1,016.4 | $882.4 |
| 2027 | $1,090.3 | $990.0 |
| 2028 | $1,169.4 | $1,114.4 |
| 2029 | $1,254.4 | $1,258.8 |
| 2030 | $1,345.5 | $1,413.9 |
| 2031 | $1,443.2 | $1,593.5 |
| 2032 | $1,548.0 | $1,802.3 |
| 2033 | $1,660.5 | $2,046.1 |
| 2034 | $1,781.1 | $2,332.2 |
As seen from the above table, as the dividend income reaches parity in 2029 and beyond that, Telus overtakes high-yield Timbercreek Financial in dividend income.
If you want to start receiving passive income immediately, consider investing in a higher yield. If you have time to retire, consider investing in higher dividend growth.
While we write about good dividend stocks worth buying in an RRSP, you have to match the expected return from the stock with your investment objective.
Two Canadian dividend stocks for RRSP investors
Telus has a 20-year history of paying dividends. It enjoys stable cash flow from subscriptions. The 5G upgrade and regulatory challenges have increased the interest expense, putting pressure on free cash flow (FCF). Its dividend payout ratio increased to 91%, above its targeted range of 65 to 75% of FCF. As interest rates fall and the company realizes the revenue from its 5G infrastructure, the payout ratio will stabilize.
TC Energy (TSX:TRP) is another high-yield, high-dividend growth stock you could consider for an RRSP. It is splitting the company into oil pipeline and gas pipeline businesses. This will accelerate its dividend growth to 5% for the gas pipeline business from the current 3%. TRP has a 23-year dividend growth history and a strong pipeline infrastructure that keeps your dividend flow coming. If you invest now, you can lock in a 7% yield. The stock also offers a DRIP. You can sell the shares of the oil business after the split and invest that amount in the gas pipeline business to enjoy higher dividend growth.
