Canadian savers are searching for the best strategy to build a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio that can provide extra retirement income along with earnings from government and work pensions.
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Power of compounding
One popular investing approach involves buying top TSX dividend stocks and using the distributions to acquire additional shares. This can often be done automatically through a company’s dividend-reinvestment plan (DRIP) and is normally easy to set up with your online investing broker.
Some firms provide investors with a discount on the share price as an incentive to use the dividends to buy more stock instead of taking the cash. The benefit for the company is that the money can be then used for growth initiatives or to pay down debt. The normal DRIP discount is typically in the 2% to 5% range. In addition, there is no transaction fee for making the DRIP purchase.
Each time a dividend payment buys more shares, the next dividend payment is larger. This, in turn, can potentially buy even more stock, depending on the movement of the share price. It takes some time to see meaningful changes, but the compounding process can have a significant impact on the size of the portfolio, especially when dividends increase at a steady pace and the share price trends higher.
Fortis
Fortis (TSX: FTS) is a Canadian utility company with $75 billion in assets spread out across Canada, the United States, and the Caribbean. The businesses include power generation facilities, electric transmission networks, and natural gas distribution utilities. Nearly all of the revenue comes from rate-regulated assets. This means cash flow should be predictable and reliable, which makes it easier for management to plan growth investments and to pay steady dividends.
Fortis is working on a $26 billion capital program that will increase the rate base from $39 billion in 2024 to $53 billion in 2029. As the new assets go into service, the boost to cash flow should support planned annual dividend hikes of 4% to 6% over five years. Fortis raised the dividend in each of the past 51 years. The stock is down from the 12-month high of around $69 to $65 at the time of writing. Investors who buy the dip can pick up a dividend yield of 3.8%.
Enbridge
Enbridge (TSX: ENB) is another top TSX dividend stock to consider today. The energy infrastructure giant has increased its dividend in each of the past 30 years. Acquisitions made in 2024, along with the current $28 billion capital program, should drive steady earnings expansion to support ongoing dividend increases.
Enbridge is best known for its oil pipeline infrastructure, but it has diversified the portfolio in recent years, adding an oil export terminal, natural gas utilities, and a renewable energy developer. Enbridge has extensive natural gas transmission and storage assets in Canada and the United States and is a partner in the Woodfibre liquified natural gas (LNG) export facility being built in British Columbia.
Investors who buy ENB stock at the current level can get a dividend yield of 6%.
The bottom line
Fortis and Enbridge pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks deserve to be on your radar.
