Self-Directed RRSP Investors: A Top Dividend Stock to Build Pension Wealth

The RRSP has a long history in Canada and continues to be an important tool for investors.

| More on:

Canadians are using a number of tools, including Registered Retirement Savings Plans (RRSPs), to help them meet their income goals in retirement.

The RRSP has a long history in Canada and continues to be an important savings vehicle for investors. The program began in 1957 as a means to help people who might not have company pensions. The original contribution limit was 10% of income from the previous year and unused contribution space couldn’t be carried forward.

Over the past six decades, the government tweaked the rules to make the RRSP more appealing. Today, investors can contribute 18% of last year’s earnings up to a maximum of $26,500, and any unused contribution room can be carried into future years.

Contributions to the RRSP can be used to reduce taxable income in the allocated year. Once the contributions are made, any interest, dividends, or capital gains generated are protected from the tax authorities, while the funds remain inside the RRSP account. Withdrawals are taxed at your marginal tax rate for that year.

Ideally, the contributions are made at a point in your career when your tax rate is higher than it will be when the money is removed in retirement.

Let’s take a look at a top dividend stock that might be an interesting pick to get you started.

BMO

Bank of Montreal (TSX:BMO)(NYSE:BMO) has never missed a dividend payment in the past 190 years.

The company has the longest dividend history of all the big Canadian banks, and investors should feel comfortable owning the stocks for decades.

Bank of Montreal has a market capitalization of $63 billion. This puts it in fourth spot in the Canadian market. The bank is best known for the quality of its commercial banking operation in both Canada and the United States. Bank of Montreal’s personal banking, wealth management, and capital markets segments round out a balanced revenue stream.

The company reported fiscal Q3 2019 adjusted earnings of $1.58 billion, representing a 1% increase over the same quarter last year. Revenue increased 5%, with solid performances from both personal and commercial banking an the capital markets group. Return on equity remains solid at 13.2%.

Provisions for credit losses increased on a year-over-year basis, albeit from a low level. Overall credit quality across the loan base remains strong, but the trend is worth watching in the coming quarters to see if more people and businesses are getting into trouble.

The American division, BMO Harris Bank, has grown over the past 30 years and now includes more than 500 branches. The U.S. operations contribute about a third of total profits, providing the bank with a nice hedge against any potential downturn in Canada.

Bank of Montreal is a good stock to own to get U.S. exposure through a Canadian company.

With a CET1 ratio of 11.4%, Bank of Montreal remains well capitalized to ride out the next downturn. Some pundits point to high consumer debt levels and expensive house prices in Canada as potential threats. Bank of Montreal’s mortgage portfolio is smaller than some of its peers on a relative basis, so the risk on this front should be lower.

Falling bond yields and a halt to rate hikes in Canada should help reduce default threats in the medium term.

The bottom line

Given the current market conditions, the stock trades at a reasonable 10.5 times trailing earnings, and investors who buy today can pick up a dividend yield of 4.2%.

If you are searching for a reliable dividend stock to put in your self-directed RRSP portfolio, Bank of Montreal should be a solid buy-and-hold pick right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stock mentioned.

More on Dividend Stocks

Hourglass and stock price chart
Dividend Stocks

Where Will Brookfield Stock Be in 5 Years?

Based on its recent successes, Brookfield Corp (TSX:BN) looks poised to be more valuable in five years' time than today.

Read more »

hand stacks coins
Dividend Stocks

The Smartest Dividend Stocks to Buy With $400 Right Now

The market is full of dividend stocks to buy. Here's a look at two options that cater to both growth…

Read more »

ways to boost income
Dividend Stocks

This Top TSX Dividend Stock Down 10.78% Is Ready for a Rebound

The rebound of an underperforming but top TSX dividend stock is coming due to a significant product diversification.

Read more »

Canadian Dollars bills
Dividend Stocks

3 Dividend Stocks to Supercharge Your Passive Income

These companies are known for their consistent payout histories and high yields can supercharge your passive-income portfolio.

Read more »

space ship model takes off
Top TSX Stocks

My 5 Favourite Stocks to Buy Right Now

There are plenty of great stocks on the market. Here's a look at my favourite stocks to own for growth…

Read more »

Close up of an egg in a nest of twigs on grass with RRSP written on it symbolizing a RRSP contribution.
Dividend Stocks

3 Evergreen RRSP Stocks Every Canadian Investor Should Own

If you're looking into RRSP stocks, it's quite likely you've come across these on many, if not all, of the…

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Dividend Stocks

3 Reasons Your CPP Benefits Are More Valuable Than You Think

Holding iShares S&P/TSX Capped Composite Index Fund (TSX:XIC) in a TFSA can supplement your CPP.

Read more »

open vault at bank
Dividend Stocks

Don’t Get Cute; Just Buy Stability: Top Defensive TSX Stocks to Buy Now

A healthy risk tolerance is essential for most investors, but many stray from the tried and tested, hoping to find…

Read more »