Canadian investors are searching for ways to build savings to complement company and government pensions in retirement. One popular strategy involves buying top dividend-growth stocks and using the distributions to acquire new shares.
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Power of compounding
Each dividend payment that is used to buy more shares leads to a larger dividend amount on the next payment. The snowball effect is slow in the beginning but can turn relatively small initial investments into substantial savings over the course of 20 or 30 years. This is particularly true when a company steadily increases its dividend. Share prices tend to drift higher over time, as well, when dividend growth is supported by rising revenue and cash flow.
Market pullbacks are easier to ride out with this investing strategy. Drops in the share price result in more stock being purchased with the dividend payments. This increases the yield on those shares and cuts the average cost of the position.
Investors with a buy-and-hold Registered Retirement Savings Plan (RRSP) focus should consider stocks with long track records of dividend growth.
Fortis
Fortis (TSX:FTS) just gave shareholders their 51st consecutive annual dividend increase. The 4.2% hike to the payout is in line with expectations, and more increases should be on the way.
Fortis is working on a $26 billion capital program that will increase the rate base from $38.8 billion in 2024 to $53 billion in 2029. The resulting boost to revenue and cash flow should support planned annual dividend increases of 4% to 6% over the next five years.
Fortis provides a 2% discount to shareholders who use their dividends to buy new shares under the dividend-reinvestment plan. At the time of writing, Fortis stock provides a yield of 4%.
Enbridge
Enbridge (TSX:ENB) raised its dividend in each of the past 29 years. The energy infrastructure giant continues to expand its presence in the United States and Canada through acquisitions and development projects.
Enbridge completed its US$14 billion purchase of three natural gas utilities in the United States this year. That follows a US$3 billion acquisition of an oil export facility in Texas in 2021. Enbridge also added an American renewable energy developer in recent years and is a partner in the Woodfibre liquified natural gas (LNG) facility being built on the coast of British Columbia.
These assets, combined with the oil and natural gas transmission infrastructure, make Enbridge a leading player in the North American energy industry. The company is positioned to benefit from rising international demand for Canadian and U.S. energy and is also playing a role in the energy transition to wind and solar.
Enbridge is working through a $24 billion capital program to drive additional growth in the next few years. Investors who buy ENB stock at the current level can get a dividend yield of 6.5%.
The bottom line on RRSP dividend stocks
Fortis and Enbridge pay attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed RRSP, these stocks deserve to be on your radar.
