Retirees: You'll Want Your CPP With a Side of This Dividend Stock

Retirees: You’ll Want Your CPP With a Side of This Dividend Stock

CPP is great, don’t get me wrong. But it’s certainly not something retirees can depend on alone. Which is why this dividend stock is an even better option.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published October 16, 2024 4:56 pm EDT

When it comes to retirement planning, many Canadians rely heavily on the Canada Pension Plan (CPP) as their primary source of income. However, for those seeking a more comfortable and financially secure retirement, relying solely on CPP may not be enough. This is where dividend stocks can offer significant benefits, helping retirees enjoy a more financially comfortable future.

Canadian dollars are printed — Source: Getty Images

Why not just CPP?

CPP, while a great base, has limitations. As of 2024, the maximum monthly CPP payout is $1,364 if you begin at age 65. That adds up to roughly $16,400 per year. However, not everyone qualifies for the maximum benefit, and many retirees receive much less. The benefit is based on your contributions during your working years.

If you didn’t consistently work at the maximum earnings level, your payout will be lower. Though CPP is guaranteed and adjusts for inflation, its payments alone may not cover all living expenses, especially with the rising costs of healthcare, housing, and daily living.

Royal Bank of Canada stock

Now, let’s turn to those dividend stocks I mentioned. Royal Bank of Canada (TSX: RY) is one of the strongest dividend stocks on the TSX. It’s a reliable blue-chip stock with a solid history of paying dividends. Currently, RY’s forward annual dividend is $5.68 per share, offering a dividend yield of 3.39%. The payouts, which occur on a quarterly basis, provide a consistent cash flow. And because the stock has shown resilience and growth over time, the dividends could increase in the future.

About the future: RY is well-positioned for growth. Canada’s largest bank is diversifying its revenue streams and expanding its digital services to stay competitive in the evolving financial landscape. Furthermore, it has a solid balance sheet with more than $732 billion in total cash and manageable debt. This offers security for investors, including retirees who are looking for low-risk opportunities.

That said, it’s important to consider some of the risks of investing. RY, like all stocks, is subject to market fluctuations. Prices can go up and down, which means there’s a risk of losing your principal. Plus, unlike CPP payments, dividends aren’t guaranteed. Companies can reduce or suspend their dividend payments during tough economic times, although RY’s strong history makes this unlikely in the near future.

Bottom line

All together, while CPP provides a secure foundation for retirement, it may not be enough for many retirees to maintain their desired lifestyle. Supplementing CPP with dividend stocks like RY can significantly enhance financial security by offering a reliable income stream.

One of the biggest benefits of dividend stocks like RY is the potential for reinvestment and compounding. By reinvesting dividends rather than taking them as cash, you can buy more shares of RY, which in turn increases your future dividend payouts. Over time, this snowball effect can significantly boost your investment returns.