Canadian investors are using their self-directed Registered Retirement Savings Plan (RRSP) accounts to build funds that can provide retirement income to complement OAS, CPP, and work pensions.
One popular RRSP investing strategy involves buying top TSX dividend stocks and reinvesting the distributions in new shares to harness the power of compounding.
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Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) is a major player in the Canadian energy market with diverse assets including oil sands, offshore oil, conventional heavy oil, conventional light oil, natural gas liquids, and natural gas production.
The stock trades near $66 per share at the time of writing. It has been as low as $41 and topped out above $70 in the past 12 months.
CNRL relies on oil and natural gas prices to determine the profit margin on its production. Energy prices can vary considerably depending on economic and geopolitical events, as investors have witnessed in recent years, but CNRL has a low relative production cost that enables it to make good money, even during leaner periods in the industry. That being said, the stock price can be volatile over short timeframes.
Big pullbacks give investors a chance to buy at a discount and collect a higher dividend yield, while waiting for the next rebound. The long-term outlook should be positive for the company. Increased pipeline capacity and new export facilities are enabling CNRL to sell more oil and natural gas to global buyers. Demand for Canadian energy is rising and the current government wants to make Canada an energy superpower.
CNRL raised the dividend in each of the past 26 years. Investors who buy at the current share price can get a dividend yield of 3.8%.
A $10,000 investment in CNQ stock 25 years ago would be worth more than $400,000 today with the dividends reinvested.
Enbridge
Enbridge (TSX:ENB) is best known for being an oil pipeline company. This is still an important part of the businesses, as Enbridge moves nearly a third of the oil produced in Canada and the United States.
In recent years, however, management made strategic investments to broaden out the asset portfolio to take advantage of emerging trends in the energy sector. Enbridge spent US$3 billion to buy an oil export terminal in Texas and acquired three natural gas utilities in the United States for US$14 billion. The company also bulked up its renewable energy division through the purchase of the third-largest American wind and solar project developer.
Enbridge is currently working through a $41 billion secured capital program that is expected to drive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) higher by 5% per year over the medium term. The resulting boost to distributable cash flow (DCF) should lead to ongoing dividend increases. Enbridge raised the dividend in each of the past 31 years.
ENB stock is down to $70 per share from the $80 it fetched in recent weeks. Investors who buy at the current price can get a dividend yield of 5.5%.
A $10,000 investment in Enbridge 25 years ago would be worth about $200,000 today with the dividends reinvested.
The bottom line
There is no guarantee that CNRL and Enbridge will deliver the same returns over the next quarter century, but these stocks still deserve to be on your RRSP radar for a diversified portfolio focused on long-term wealth creation.
