Canadian investors are using their self-directed Registered Retirement Savings Plan (RRSP) to build personal pensions that can complement the Canada Pension Plan, Old Age Security, and company pensions in retirement. One popular RRSP strategy involves buying quality dividend-growth stocks and using the distributions to acquire new shares.
Power of compounding
Harnessing a dividend-reinvestment plan (DRIP) can deliver meaningful long-term returns for RRSP investors. Each dividend payment that buys new shares triggers an even larger dividend payment on the following distribution. The growth process is slow at the start but can snowball over the course of two or three decades, turning modest initial investments into considerable savings.
Pullbacks in the share price are opportunities to buy more shares with the dividend payments. Stocks that raise their dividends on a regular basis tend to rise over time, adding even more growth to the value of the portfolio.
Fortis
Fortis (TSX:FTS) is a good example of a dividend-growth stock that has delivered attractive total returns for investors.
A utility operator with $69 billion in assets located across Canada, the United States, and the Caribbean, Fortis owns power generation facilities, electric transmission networks, and natural gas distribution utilities. Nearly all of the revenue comes from rate-regulated assets, so cash flow is quite predictable and reliable.
Fortis is working on a $25 billion capital program that will see the rate base expand from $37 billion in 2023 to more than $49 billion in 2028. The resulting boost to cash flow should support planned annual dividend increases of 4-6%. Fortis raised the dividend in each of the past 50 years. The stock currently provides a yield of 4%.
Fortis offers investors a 2% discount on shares purchased using the DRIP, so you get a bonus right from the start.
Enbridge
Enbridge (TSX:ENB) is another top TSX dividend-growth stock that has delivered attractive total returns for buy-and-hold investors.
The energy infrastructure giant raised the dividend in each of the past 29 years, and more gains should be on the way in line with projected growth in distributable cash flow of 3-5% over the medium term.
Enbridge is in the final stages of completing a US$14 billion purchase of three natural gas utilities in the United States. These assets will provide a full-year revenue impact in 2025. In addition, Enbridge is working on $24 billion in secured capital projects that will boost cash flow.
Enbridge has become a more balanced company over the past few years, with new investments targeting renewable energy, natural gas transmission and distribution, and energy exports. These assets, along with the core oil pipelines, position Enbridge to benefit from anticipated demand growth across all three segments.
Investors who buy ENB stock at the current level can get a dividend yield of 6.9%.
The bottom line on RRSP investments
There is no guarantee that Fortis and Enbridge will repeat the same returns over the coming decades, but the stocks still deserve to be on your radar, and the strategy of using dividends to buy new shares remains a proven one for building long-term retirement savings.
