One popular strategy for building retirement wealth involves buying quality dividend stocks and using the distributions to acquire new shares.
Over time, the power of compounding can turn modest initial investments into a substantial pension fund.
The rebound in the stock market quickly wiped out many of the great deals, but some stocks with top dividend yields still look cheap.
Let’s take a look at two companies that might be interesting picks right now for a dividend-focused Tax-Free Savings Account (TFSA) or RRSP portfolio to help you retire wealthy.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is the third-largest Canadian bank with a market capitalization of $64 billion. The stock now trades at close to $53 per share compared to $74 in February before the crash. Bank of Nova Scotia hit a low near $47 in March, so it hasn’t recovered as much as the broader TXS Index, which is more than 30% higher than the 2020 low.
Investors might be taking a cautious approach due to Bank of Nova Scotia’s large exposure to Latin America. Economies that rely heavily on strong commodity prices are taking a hit. Bank of Nova Scotia invested billions of dollars in recent years to build a significant presence in Mexico, Colombia, Peru, and Chile. Mining and oil production are key parts of these economies.
In Canada, high unemployment is a concern for all the banks. Canadians entered the recession with record debt levels and the latest Statistics Canada report indicates unemployment hit 13% in April. Banks deferred mortgage payments for roughly 10% of clients since the start of the pandemic.
As the lockdowns end, the hope is that businesses will bring back staff and workers will quickly return to their jobs. If unemployment doesn’t fall materially before the end of the year, the banks could be faced with a rise in defaults and a potential crash in the Canadian housing market.
The upside?
While risks remain, most of the coming pain is likely already priced into Bank of Nova Scotia’s share price. Government measures to support Canadians and businesses should mitigate the damage and provide a foundation on which to rebuild the economy.
Bank of Nova Scotia has a strong capital position and the dividend should be safe. Investors now get a 6.8% yield.
Telus
Telus (TSX:T)(NYSE:TU) is a leader in the Canadian communications industry with world-class wireless and wireline networks.
The lockdowns across the country are reshaping the way people work and live. Home offices are now the norm, with people conducting meetings through digital platforms. Students are using online services to cover their education material. Everyone is taking advantage of streaming products to help ease the lockdown boredom.
This might not change significantly after the economy re-opens, however, and Telus should benefit from higher demand for larger data plans.
Telus is also a leader in the digital health sector. The pandemic is driving strong growth in the use of digital services by health professionals across the industry. Telus Health should benefit from the surge in demand for online health consultations and the division could become a significant contributor to revenue and earnings in the coming years.
Telus has a long track record of steady and reliable dividend growth. The products and service are essential for people to conduct their daily lives, so the stock should hold up well even if we see the broader market retest the 2020 lows later this year.
The share price sits at $22.50 compared to $27 before the crash. Investors who buy now can pick up a 5% dividend yield.
The bottom line
Bank of Nova Scotia and Telus appear cheap right now and pay attractive dividends that should be very safe. If you are searching for high-yield picks for a dividend-focused TFSA or RRSP to build retirement wealth, these stocks deserve to be on your buy list.
