Canadian dividend investors are searching for top TSX stocks to add to their self-directed Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) portfolios focused on dividend income and long-term total returns.
Choosing the best dividend stocks for a retirement fund involves more consideration than simply chasing the highest yields.
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Fortis
Fortis (TSX: FTS) has a dividend yield of about 3.4% at the time of writing. This is lower than the yield that is available from many Canadian stocks. The company has, however, increased the dividend in each of the past 52 years.
Each time there is a dividend hike, the yield on the initial investment increases. When the dividend grows steadily, it doesn’t take long to make up for the smaller original yield. The consistent dividend growth also tends to lead to a higher share price over time.
Fortis intends to raise the dividend by 4% to 6% per year through at least 2030, supported by the current $28.8 billion capital program that is expected to boost the rate base from $42 billion to nearly $58 billion over five years. Revenue and profit growth driven by the new assets as they are completed and go into service should enable the board to extend the streak of annual dividend increases.
Fortis has other projects under consideration that could get added to the capital plan. Demand for electricity and natural gas are expected to soar in the coming years. Fortis owns and operates power generation facilities, electric and natural gas distribution utilities, and electricity transmission grids.
Enbridge
Enbridge (TSX: ENB) is popular among income investors for its high dividend yield. The pullback in the share price over the past few months has pushed up the yield to nearly 6%. This is an attractive return, as long as the dividend is safe. When dividend yields start to drift above 7%, the market is often signalling a concern that the distribution could be at risk of being held at the current level, or even cut.
Investors will need to keep an eye on Enbridge in the coming months to see if the stock price continues to slide. Recent weakness is due to a jump in bond yields as markets prepare for higher interest rates as the central banks move to keep inflation under control. Enbridge, like Fortis, has a large capital program and uses debt to fund some of the projects that often cost billions of dollars and can take years to complete.
For the moment, the pullback in the share price looks like a good entry point for dividend investors. Enbridge’s $41 billion capital program is expected to drive 5% annual growth in distributable cash flow over the medium term. This should enable the board to continue to raise the dividend. Enbridge has increased the distribution in each of the past 31 years. That’s a solid track record through some challenging times.
Demand for North American oil and natural gas is on the rise, and governments in both Canada and the United States appear to be supportive of expansion of energy infrastructure. This should bode well for Enbridge over the coming years.
Is one a better bet?
Investors seeking high-yield dividend income might want to make Enbridge the first choice, given the extent of the recent dip in the stock price. If your focus is more on long-term total returns, I would probably make Fortis the top pick, or split a new investment between the two stocks today.
