Canadian investors are using their self-directed Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) contribution space to build portfolios that can deliver retirement income to complement CPP, OAS, and company pensions.
One popular strategy to build retirement wealth involves owning top TSX dividend stocks and using the distributions to buy new shares.
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Power of compounding in a dividend portfolio
Each time a dividend payment is used to buy additional shares, the next dividend payment is larger. The compounding effect is small at the start of the process, but over the course of 20 or 30 years, the strategy can turn modest initial investments into significant savings. This is particularly the case when dividend payments increase at a steady pace and the share price gradually trends higher.
Fortis
Fortis (TSX: FTS) raised its dividend in each of the past 52 years, making it one of the best dividend-growth stocks on the TSX.
The company operates nearly $80 billion in utility assets in Canada, the United States, and the Caribbean. Businesses in the portfolio include power generation facilities, electric and natural gas utilities, and electricity transmission grids. Nearly all of the revenue comes from rate-regulated operations that provide essential power and energy to homes and companies. This means cash flow is largely predictable and reliable, which helps management plan growth investments.
Fortis is working on a $28.8 billion capital program that will increase the rate base by about 7% annually over five years. Revenue and profits from the new assets should support planned dividend growth of 4% to 6% per year through 2030.
Fortis trades near $76 per share at the time of writing, compared to $83 in the summer. Investors who buy the dip can pick up a dividend yield of 3.4%. This is lower than the yield available on many other TSX stocks, but the dividend growth will steadily boost the yield on the initial investment.
Long-term investors have done well with Fortis. A $10,000 investment in FTS stock 30 years ago would be worth about $300,000 today with the dividends reinvested.
Risks
The U.S. Federal Reserve just raised rates to keep inflation under control. Additional rate increases are likely on the way over the course of the next year. Fortis uses debt to fund part of its growth program, so higher borrowing costs can cut into profits and reduce cash that is available for dividend growth.
Rate hikes likely won’t be as aggressive as they were in 2022 and 2023, but they are still a headwind for utility stocks. The last time the American and Canadian central banks raised rates, FTS fell from $64 to $50, before eventually rebounding to the 2026 high.
The bottom line
Near-term turbulence should be expected and there is no guarantee that Fortis will deliver the same returns over the next 30 years. That being said, buying Fortis on big pullbacks has historically proven to be a savvy move for patient investors.
If you have some cash to put to work, this stock still deserves to be on your radar for a diversified dividend portfolio focused on generating long-term total returns.
