Canadian investors in the early stage of their career are using their self-directed Tax-Free Savings Account (TFSA) to build investment portfolios as part of their long-term retirement savings program.
One popular investing strategy to build retirement wealth involves owning top Canadian dividend stocks and using the distributions to buy new shares.
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Dividend reinvestment benefits
Each time a dividend payment is used to buy new shares, the next dividend payment is larger. The impact on a portfolio is small at the beginning of the process, but the power of compounding starts to really kick into gear over time. This is particularly the case when companies steadily increase the size of their dividend payments. That tends to support a rising share price over the long run.
Many companies offer a dividend reinvestment plan (DRIP) for investors. This often provides a discount on the share price when dividends are used to acquire new stock. The benefit for the company is that it can keep more of its cash, which can be used to reduce debt or fund growth investments.
TFSA or RRSP?
All dividends, interest, and capital gains earned inside a TFSA or RRSP are protected from taxation while the funds are inside the registered account. What happens when the money is removed, however, is different.
In the case of the TFSA, contributions are made with after-tax income, so any profits removed from the TFSA remain tax-free. RRSP contributions, on the other hand, are made with pre-tax income and are used to reduce taxable income for the chosen tax year. When the RRSP money is eventually withdrawn, it is then taxed as income at the person’s tax rate at that time.
Younger investors might decide to contribute to a TFSA to start their savings and reserve RRSP contribution room to use later in their career. Ideally, you want to contribute to RRSP accounts when you are in a high marginal tax bracket and withdraw the funds in retirement when your tax bracket might be lower.
Good dividend stocks for a retirement portfolio
In the current market conditions, where the TSX is near a record high, it makes sense to look for reliable dividend-growth stocks that have long track records of increasing their distributions through the full economic cycle.
Enbridge (TSX:ENB) is a good example of a dividend-growth stock that currently offers an attractive dividend yield.
Enbridge recently increased its dividend by 3%. This marks 31 consecutive years of dividend growth. Investors whio buy ENB stock at the current price can get a dividend yield of 6%.
The energy infrastructure giant continues to grow through acquisitions and capital investments. Enbridge has $35 billion in secured capital projects across its core business segments, including oil, natural gas, and renewable energy infrastructure.
Fortis (TSX:FTS) is another top TSX dividend-growth stock. The board has increased the dividend in each of the past 52 years.
Fortis owns and operates utility assets that include power generation facilities, natural gas distribution utilities, and electricity transmission infrastructure. These businesses provide essential services and generate predictable revenue and cash flow regardless of the conditions in the overall economy.
Fortis is working on a $28.8 billion capital program over five years. As the new assets are completed and go into service, Fortis expects earnings growth to support planned annual dividend hikes of 4% to 6% through 2030.
The bottom line
Enbridge and Fortis are good examples of stocks that have long track records of dividend growth. If you have some cash to put to work in a TFSA focused on dividends, these stocks deserve to be on your radar.
