Canadian savers are using their self-directed Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) to build portfolios of investments that can provide enough income to potentially retire early before Canada Pension Plan and Old Age Security pensions are available.
One popular investing strategy to build retirement wealth involves owning dividend-growth stocks and using the distributions to buy more shares.
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Power of compounding
Each time a dividend payment is used to acquire additional shares the next dividend payout is larger. This can potentially buy even more shares, depending on the movement of the share price, leading to an increase in the dividends received on the next payout. The impact on the holdings is small at the start, but the process can turn a modest initial investment into a meaningful retirement fund over time, especially when dividends increase steadily and the share price trends higher.
The TSX is home to many good dividend-growth stocks that have made some long-term investors quite rich. New investors who want to use this strategy should look for companies that have long track records of increasing their distributions regardless of the state of the economy.
Fortis
Fortis (TSX: FTS) is a good example of a top TSX dividend-growth stock. The board has increased the dividend annually for the past 51 years and intends to boost the distribution by 4% to 6% per year through at least 2029.
Steady dividend increases supported by rising revenue and higher profits tend to lead to an upward trend in the share price over the long haul.
That being said, Fortis isn’t immune to market pullbacks or rate shocks. The stock took a hit in 2022 and 2023 when the Bank of Canada and the U.S. Federal Reserve aggressively raised interest rates to fight inflation. Fortis uses debt to fund a good chunk of its capital program. A sharp increase in interest expenses reduces profits and could potentially cut into cash flow that is available to pay down debt or fund dividends.
Fortis, however, does a good job of managing its balance sheet to provide stability for shareholders during difficult times. At the same time, the company’s businesses, including natural gas utilities, power generation facilities, and electricity transmission networks, all generate rate-regulated revenue. This provides predictable and reliable cash flow, which makes it easier to plan growth investments.
Fortis is currently working on a $26 billion backlog of capital projects. As the new assets are completed and go into service the boost to cash flow should support the planned dividend growth. The company will provide an update to its five-year capital program when its releases the Q3 2025 earnings results in the coming weeks.
Fortis also has a strong track record of driving growth through acquisitions. The company hasn’t made a large purchase for several years, but lower borrowing costs could spark a new wave of consolidation in the utility sector.
Long-term Fortis investors have done well. A $10,000 investment in FTS stock 30 years ago would be worth about $340,000 today with the dividends reinvested.
The bottom line
Owning stocks comes with risks and investors need to have the patience to ride out downturns.That being said, the strategy of owning quality dividend-growth stocks and using the distributions to acquire new shares is a proven one to help build retirement savings.
There is no guarantee Fortis will deliver the same returns in the coming decades, but the stock deserves to be on your radar.
