Canadian investors are searching for good stocks to hold inside a self-directed Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and total returns.
One popular strategy for building RRSP wealth involves using distributions from the stocks to acquire new shares.
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Power of compounding
Most people have a buy-and-hold approach when it comes to investing inside their RRSP. Over time, this has historically proven to be successful as markets typically recover from crashes to eventually reach new highs.
Owning top dividend-growth stocks and using the dividends to buy new shares is one way to harness the power of compounding to create wealth. Each new share purchased with the dividend payment leads to a larger dividend payment on the next distribution. This is then used to buy additional shares, which in turn increases the dividend received on the next payment. The snowball effect is small in the beginning, but over time, the strategy can turn modest initial investments into meaningful savings, especially when the company raises the size of the dividend at a steady pace and the share price trends higher.
Market corrections are easier to stomach as well, since the reduced share price enables the dividends to buy even more shares.
Good dividend stocks for RRSP investors
It makes sense to look for companies that have long track records of raising their dividends through the full range of the economic cycle. High yields are attractive, but reliable dividend growth is more important over the long haul.
Fortis (TSX:FTS) is a good example of a top TSX dividend-growth stock to consider for a buy-and-hold RRSP. The board has increased the dividend annually for the past 51 years. This reliability is one reason the share price tends to drift higher.
Fortis operates utility businesses in Canada, the United States, and the Caribbean. Revenue primarily comes from rate-regulated assets, so the cash flow is quite predictable. Fortis grows through acquisitions and capital projects. The current $26 billion capital program is expected to raise the rate base from $39 billion in 2024 to $53 billion in 2029. As the new assets get completed and start generating revenue, Fortis expects earnings to increase enough to support planned annual dividend increases of 4% to 6% over five years. Investors who buy FTS stock at the current price can pick up a dividend yield of 3.5%.
Enbridge
Enbridge (TSX:ENB) offers great dividend growth and a high yield right now. The board raised the dividend in each of the past 30 years. The stock is up more than 20% in the past 12 months, but still provides a dividend yield of 5.8% at the time of writing.
Enbridge has diversified its assets in recent years. The transmission of oil and natural gas from producers to their customers is still the core of the business, but Enbridge’s acquisition spree has also made it the largest natural gas utility operator in North America, as well as an oil exporter and a significant player in the wind and solar sector.
The capital program now sits at $32 billion. This should help drive revenue and cash flow growth to support ongoing dividend increases.
The bottom line
Owning top dividend stocks and using the distributions to buy new shares is a proven strategy for building long-term savings for retirement. Fortis and Enbridge are not cheap today, but the stocks deserve to be on your radar and part of a diversified portfolio. The companies continue to raise their dividends at a steady pace, and the share prices should trend higher as the growth initiatives drive revenue expansion.
