Building a retirement pool is a long-term investment. The Canada Revenue Agency (CRA) takes a 5.95% contribution from your salary for 20 years to build you a pool that can pay 30% of your last generated income. In a Canada Pension Plan (CPP), you do not have the option to choose where to invest. Neither can you withdraw from CPP. If you show a similar dedication and invest only 5% of your income in a few dividend stocks, you can generate a higher pension and live a wealthy retirement.
How Canadian stocks can generate retirement wealth
I chose a Registered Retirement Savings Plan (RRSP) for three reasons.
- Firstly, it allows you to deduct the invested amount from your taxable income. An incentive like this will encourage you to invest.
- Secondly, it allows your investment to grow tax-free, which means compounding returns will not be diluted by taxes.
- Lastly, early RRSP withdrawals are subject to withholding tax, which will discourage withdrawals. You can sell the stock and use the proceeds to buy a new stock tax-free as long as the money stays inside an RRSP.
Two Canadian stocks that have dividend fortunes
Now for the step where you select the stock that can generate wealth in 10–15 years. In dividends, a higher dividend growth rate accelerates the compounding effect if the investment is for the long term. A higher dividend yield is better if you want passive income immediately or in the next five years. Here are two stocks with a high dividend growth rate.
Manulife Financial
Manulife Financial(TSX:MFC) is well-known for its insurance and wealth management business. The company manages pension funds for many corporations. It sustained through the 2008 Financial Crisis and shown resilience to macro events. Its dividends have been choppy, with the company giving no dividend growth between 2010 and 2013 due to a fallback from the financial crisis. However, it revived its business and has been growing its dividend at an average annual rate of 10.8%.
MFC has sustained such a high dividend growth rate for 11 years and can continue to do so in a strong financial market. The company offers a dividend reinvestment plan (DRIP), which uses the dividends to buy more income-generating shares of Manulife every quarter. Its stock price growth is low as it grows its dividend by 10%. In 15 years, the stock can add significantly to your passive income.
Cogeco Communications
Internet services provider Cogeco Communications (TSX:CCA) has also been growing its dividend at an average annual rate of 11% for the last 10 years. And despite growing dividends at such a high rate, the company is paying only 39% of its free cash flow. Cogeco is a small-cap company with a market cap of almost $3 billion. The company is reinvesting some of its cash flows towards network expansion to help generate more income.
In the digital age, the internet is the new oil and has ample scope to earn higher regular cash flows. Almost all your devices will be connected to the internet, giving Cogeco ample scope to expand business and grow dividends for another decade or two. The biggest risk is its significant debt. If the debt becomes unbearable and starts reducing net profit, you might want to switch to another dividend stock.
Investor takeaway
Every stock carries risk. So even in stocks that are a buy-and-hold forever, it is important to review their performance and ensure that your reason to be bullish on the stock is intact.
