Canadians use their self-directed Registered Retirement Savings Plan (RRSP) to build portfolios that will complement government and work pensions. One popular RRSP investing strategy involves buying top dividend stocks and using the distributions to acquire new shares.
Source: Getty Images
Enbridge
Enbridge (TSX: ENB) is a major player in the North American energy infrastructure industry. The company’s oil pipeline networks move about 30% of the oil produced in Canada and the United States. Enbridge’s natural gas transmission assets transport roughly 20% of the natural gas used in the United States. In recent years the company diversified its assets to include an oil export terminal, renewable energy, and the expansion of its natural gas utilities holdings.
Enbridge’s stock price fell from $59 in 2022 to below $44 in October last year. Since then, the stock has recovered the losses.
Most of the pullback was caused by rising interest rates in Canada and the United States in 2022 and 2023 as the central banks battled to get inflation under control. Enbridge uses debt to fund part of its growth program, so the market was concerned that rising interest expenses would reduce cash to the point where Enbridge might have to trim the dividend.
The rebound started a year ago when market sentiment switched from fears of more rate increases to anticipation of rate cuts. Now that the Bank of Canada and the U.S. Federal Reserve are cutting interest rates, investors are moving back into pipeline and utility stocks.
Enbridge is on track to meet its financial guidance for 2024. The company recently closed its US$14 billion purchase of three natural gas utilities in the United States and is working on a $24 billion capital program. Cash flow from the new assets should support the dividend. In fact, Enbridge has increased the distribution in each of the past 29 years and more dividend growth should be on the way.
Investors who buy ENB stock at the current level can get a dividend yield of 6.2%.
Fortis
Fortis (TSX: FTS) just increased its dividend by 4.2%. This marks the 51st consecutive annual dividend hike for the Canadian utilities company. Fortis operates $69 billion in assets in Canada, the United States, and the Caribbean. The businesses include power generation, electricity transmission, and natural gas distribution. Nearly all of the revenue comes from rate-regulated businesses. This means cash flow tends to be predictable and reliable.
Fortis has a $26 billion capital program on the go that will raise the rate base from about $39 billion in 2024 to $53 billion in 2029. As new assets are completed and go into service, the added cash flow should support planned annual dividend increases of 4% to 6% over the next five years. Investors who buy FTS stock at the current level can get a dividend yield of 4%.
The bottom line on dividend stocks
Enbridge and Fortis pay good 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.
