Canadians want to enjoy a comfortable retirement. This means being able to cover basic expenses and pursue some leisure interests. Getting to that point requires some retirement planning, especially in the current world where people are increasingly responsible for setting cash aside for their golden years.
One popular investing strategy for creating retirement savings involves owning top dividend stocks and using the distributions to buy new shares.
Power of compounding
When you roll a snowball to make a snowman, the impact on the size of the ball is quickly apparent each time it rolls and picks up more snow. This is a good example of the power of compounding. Investors can apply the same concept when building wealth for retirement by reinvesting dividends.
Each dividend payout can be used to buy more stock. This makes the next dividend larger and can once again buy more shares. The impact on wealth generation is small at the beginning of the process, but over the course of 20 or 30 years, investors can create large savings portfolios from relatively modest initial investments, especially when dividends grow, and share prices drift higher.
Companies like it when investors use dividends to buy new stock. Instead of being paid out, the cash stays inside the business and can be used to reduce debt or fund capital programs. Some firms even have a dividend-reinvestment plan (DRIP) that offers a reduction in the share price of up to 5% for stock purchased using dividends.
Best dividend stocks to build wealth
When searching for top dividend stocks to buy for long-term total returns, the ones with the highest yields are not always the best picks. In fact, dividend-growth reliability and the size of the dividend increases are more important than the current yield.
Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) is a good example of a top dividend-growth stock. The board has increased the dividend annually for the past 23 years and has given investors a compound annual dividend-growth rate of better than 20% over that timeframe.
The stock price can be volatile, as we saw when the pandemic initially crushed oil prices, but CNRL has bounced back, and the long-term total returns are impressive for this oil and natural gas producer.
At the time of writing, CNQ stock trades near $80 per share and provides a 4.5% dividend yield. The balance sheet is strong, and management intends to return more cash to shareholders as net debt declines. Investors currently get a quarterly dividend of $0.90 per share. Last August, the board also paid out a special bonus dividend of $1.50 per share.
If you an oil and natural gas bull, this stock deserves to be on your radar.
TD Bank
TD (TSX:TD) is another dividend-growth star to consider for a retirement portfolio. The bank has had a compound annual dividend-growth rate of about 10% over the past 25 years, even though it was forced to pause the payout increases briefly during the pandemic.
TD is sitting on a war chest of excess cash that it can use to grow the business, buy back stock, and boost dividends. The company recently cancelled its planned US$13.4 billion takeover of First Horizon, an American regional bank. The deal fell through due to regulatory issues, but investors might have dodged a bullet. TD had agreed to pay US$25 per share for First Horizon. The stock now trades near US$13.
TD will grow its existing American branch network organically over the next several years. This should drive revenue and profit growth south of the border. At home, TD’s Canadian business remains very profitable. The large capital cushion will help TD ride out any turbulence that might occur if the economy dips into a deep recession and loan defaults rise.
TD stock looks undervalued at the current share price near $84. It is off the 12-month lows but is still way down from the $108 it reached in early 2022. Buying TD stock on big pullbacks has historically proven to be a savvy move for patient investors.
The bottom line on top TSX dividend stocks
CNRL and TD are good examples of top dividend-growth stocks to consider for a self-directed Tax-Free Savings Account or Registered Retirement Savings Plan retirement fund. The TSX is home to many great dividend-growth stocks that now appear cheap and deserve to be on your watch list.
