Canadian investors are searching for good TSX stocks to add to their self-directed Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) portfolios focused on dividends and long-term total returns.
One popular strategy for building retirement savings involves owning top dividend-growth stocks and using the distributions to buy new shares.
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Power of compounding
Time is your friend when it comes to using dividend stocks to create a retirement fund inside a TFSA or RRSP. Each dividend payment that is used to automatically buy new shares of the same stock increases the size of the holdings and results in a larger dividend payment on the next distribution.
The impact is small in the early stages, but over time, it can turn relatively modest starting investments into substantial savings. This is particularly the case when dividend payments increase at a steady pace, and the share price gradually rises. The strategy also helps investors ride out market corrections, as lower stock prices enable the dividends to buy more shares.
Top stocks to buy are not necessarily the ones with the highest dividend yields. Steady growth in the distribution is more important, especially for investors who plan to own the shares for decades.
Fortis
Fortis (TSX: FTS) increased its dividend in each of the past 52 years. The Canadian utility firm intends to continue raising the dividend by 4% to 6% per year through at least 2030.
Fortis gets most of its revenue from rate-regulated businesses. These include power generation facilities, natural gas distribution utilities, and electricity transmission networks. Cash flow tends to be predictable and reliable, which helps management plan growth investments.
Fortis is currently working on a $28.8 billion capital program that will boost the rate base by about 7% per year over five years. The increase in cash flow from the new assets should support the planned dividend growth.
Demand for electricity is increasing in Canada and the United States as power-hungry AI data centres are built. At the same time, Canada wants to create a nationwide power grid. Fortis has the expertise in developing and operating electricity networks, so it would be in a good position to participate in new projects.
Long-term owners of Fortis stock have done well. A $10,000 investment in the shares 30 years ago would be worth about $300,000 today with the dividends reinvested.
Canadian Natural Resources
Canadian Natural Resources (TSX: CNQ) can be more volatile than a utility stock due to its reliance on energy prices to determine profit margins. When oil and natural gas prices tank, the share prices of energy producers tend to fall as well. These dips, which are sometimes significant, are hard to watch. They also enable investors to use the dividends to scoop up a lot more shares.
CNRL is somewhat unique in the Canadian energy patch in that it has increased its dividend annually for the past 26 years. This includes the darkest days of the financial crisis, as well as the pandemic. A strong balance sheet and CNRL’s diversified energy portfolio have enabled the company to ride out the turbulence and deliver steady dividend hikes.
CNRL takes advantage of difficult times in energy markets to acquire new production and reserves at discounted prices. Its drilling program is also very successful at adding new output. These efforts drive up revenue during lean times to boost overall profits. When energy prices rebound, the profits roll in by the truckload.
The completion of new oil and natural gas pipeline capacity in recent years has provided CNRL with additional access to international buyers. Canada’s plan to become an energy superpower could lead to even more pipelines and export facilities in the coming years. CNRL has the reserves and the capital to raise production as needed.
A $10,000 investment in CNQ stock 30 years ago would be worth more than $750,000 today with the dividends reinvested.
The bottom line
There is no guarantee that Fortis and CNRL will deliver the same returns over the next 30 years, but they still pay good dividends that should continue to grow. If you have some cash to put to work in a TFSA or RRSP retirement portfolio, these stocks deserve to be on your radar.
