Canadians are taking advantage of their registered Retirement Savings Plan (RRSP) contribution room to set aside cash for the future. One popular RRSP investing strategy involves buying top TSX dividend-growth stocks and using the dividends to acquire new shares.
RRSP benefits
The government created the RRSP in 1957 to help people save for their retirement years. The program has been improved a number of times, and still remains an important part of retirement planning, even as the Tax-Free Savings Account (TFSA) becomes increasingly popular.
RRSP contribution limits are tied to the previous year’s taxable income. The rate is 18% up to a maximum, which is $31,560, for 2024. RRSP contributions can be used to reduce taxable income in the relevant year. Taxes are paid on RRSP funds when they are withdrawn. The ideal situation is to make the RRSP contribution when a person is in a high marginal tax bracket and to remove the money in retirement at a lower personal tax rate.
One thing to remember is that any contributions made to an employer retirement plan will count towards the 18% RRSP limit. Investors can check their RRSP contribution and deduction limit for the year on their CRA notice of assessment.
Power of compounding
Interest, dividends, and capital gains can be fully reinvested inside the RRSP. Investors who automatically use dividends to buy new shares can take advantage of the power of compounding. Each time a dividend is used to buy more stock, the next dividend payment is larger. The snowball effect is small at the beginning, but over time can turn modest initial investments into significant savings, especially when dividend payouts increase at a steady pace.
Here are two stocks that are solid investments for an RRSP.
Fortis stock
Fortis (TSX:FTS) raised its dividend in each of the past 50 years. The utility company generates predictable rate-regulated cash flow and grows through a combination of capital investments and acquisitions. Fortis is currently working on a $25 billion capital program that will boost the rate base from $37 billion in 2023 to more than $49 billion in 2028. The resulting increase to cash flow should support planned annual dividend increases of 4% to 6% over the five-year timeframe.
Fortis has delivered solid total returns for investors for decades. At the current share price, the dividend provides a yield of 4.1%.
TC Energy stock
TC Energy (TSX:TRP) recently completed the IPO of its oil pipelines business. The move makes TC Energy a natural gas infrastructure play with some power generation assets. Natural gas demand is expected to surge in the coming years as tech companies that build AI data centres install standalone gas-fired power generation to ensure the facilities have reliable and scalable power supplies. Existing power grids might not be capable of meeting the power demand that is expected from AI data centres and electric vehicles in the coming years.
In the U.S. alone, there are more than 300 data centres planned or under construction. TC Energy says its natural gas infrastructure is within 80km of 60% of the sites.
TC Energy has increased its dividend for 24 consecutive years. At the current share price, the stock provides a dividend yield of 6.3%.
The bottom line on RRSP investments
Fortis and TC Energy are good examples of TSX stocks that have raised their dividends annually for decades. If you have some cash to put to work in a self-directed RRSP, these stocks deserve to be on your radar.
