Canadians can take advantage of the market correction to build portfolios of top TSX dividend-growth stocks for their self-directed Registered Retirement Savings Plans (RRSPs).
Buying stocks on dips requires some courage, as it goes against the market mood. However, great dividend stocks usually bounce back from big pullbacks and buying the dips can boost long-term returns.
Power of compounding
One popular strategy to create RRSP wealth involves owning dividend-growth stocks and using the distributions to buy new shares. This takes advantage of the power of compounding and can turn relatively small initial investments into large sums over time.
Many companies have a dividend-reinvestment plan (DRIP). This enables the purchase of new stock using dividends without the investor incurring a transaction fee. In addition, companies often offer a discount on the share price. Investors who invest using their online brokerage account can normally request to have the process automated.
The top stocks to buy tend to be ones that have long track records of dividend growth.
Enbridge
Enbridge (TSX:ENB) is a good example of a stock that now looks oversold and offers a great dividend with an excellent track record of distribution growth.
ENB stock trades near $48 per share at the time of writing compared to $59 in June last year. The pullback looks overdone, considering the solid financial performance over the past year and the good guidance for 2023 and beyond.
Enbridge expects earnings to grow 4-5% and distributable cash flow to grow in the 3-5% range in the next few years, supported by the current $17 billion capital program. This should extend the streak of dividend increases. Enbridge raised the payout in each of the past 28 years.
Investors who buy ENB stock at the current level can get a 7.3% dividend yield. This is a great return for RRSP investors, even if the share price remains near the current price.
TD Bank
TD (TSX:TD) has the highest common equity tier-one (CET1) ratio among the large Canadian banks. At 15.3% as of the end of April, TD’s CET1 ratio was way above the 11.5% the regulators will require the banks to have by later this year as a buffer to ride out potential economic turbulence.
TD is probably the safest bank stock to buy right now due to its capital position. Too much capital, however, is also negative for a bank, because the money isn’t generating revenue other than whatever it earns sitting in treasuries.
TD built up the cash pile to make a big American acquisition. The bank had intended to purchase First Horizon, a U.S. regional bank, for US$13.4 billion in an all-cash deal. TD backed out of the purchase, citing regulatory hurdles, and now has to do something with the extra money.
Ending the deal means TD won’t hit its earnings growth guidance of 7-10%. That’s part of the reason the stock is out of favour. TD is using some of the cash to buy back stock and will pursue organic growth in its targeted markets in the United States. Another takeover opportunity could also emerge to drive growth.
TD has a great track record of raising the dividend with a compound average dividend-growth rate of around 10% over the past 25 years. Investors should see a decent boost to the base distribution before the end of the year, or at least a generous bonus payout. Investors can get a 4.5% yield right now from TD stock.
The stock has moved higher in recent weeks on bargain hunting, but TD still looks attractive near the current price of under $86 per share. The stock was at $108 in early 2022, so there is good upside on a bank sector rebound.
The bottom line on top RRSP stocks
Enbridge and TD pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks deserve to be on your radar.
