The Registered Retirement Savings Plan (RRSP) is a tool to help you save for retirement. Earnings inside are tax deferred until you withdraw from it. The amounts you contribute during your working years will deduct your income for those years so that your taxes will be lower.
It follows that you could take better advantage of RRSP contributions when you’re in a high tax bracket. The idea is that when you ultimately withdraw from an RRSP in retirement, you won’t be working anymore. So, you’ll pay less income tax on the withdrawals that will be taxed as ordinary income.
Here are a couple of oversold stocks you can consider buying on the way down in your RRSP for long-term investing.
Brookfield Infrastructure Partners
It can be scary to hold stocks on the way down, not to mention buying on the way down. For example, Brookfield Infrastructure Partners (TSX:BIP.UN) stock has been on a slide for a little more than five weeks, falling about 29% in the period.
Some pundits say that a good portion of the drop has to do with rising interest rates that have negatively impacted the global infrastructure platform, including leading to cost overruns in a number of the projects Brookfield Infrastructure is involved in.
Brave investors could buy more units of the dividend stock on its way down for a higher yield. At $31.27 per unit at writing, Brookfield Infrastructure Partners offers an eye-popping cash distribution yield of about 6.7%, which was unimaginable a year ago when it only yielded about 4.2%.
Let’s be reminded that despite the huge market correction, over the last 10 years, the top utility stock has still outperformed the sector and the Canadian stock market, as shown in the graph below.
BIP.UN, XIU, and XUT Total Return Level data by YCharts
Management has demonstrated its ability to maintain a strong financial position and recycle capital by selling mature assets and redeploying into better risk-adjusted opportunities through the economic cycle. It also supports the policy of a growing cash distribution.
Brookfield Renewable Partners
If you’re concerned with the slide in Brookfield Infrastructure, you can also investigate Brookfield Renewable Partners (TSX:BEP.UN), which is a global platform in renewable power and decarbonization solutions.
The management has automatic share purchase plans for both Brookfield Infrastructure Partners and Brookfield Renewable Partners started early this month. Looking at the technical charts, it appears there’s some buying action for Brookfield Renewable Partners units so far this week, which suggests an automatic share-purchase plan. At $31.40 per unit at writing, BEP offers a nice cash distribution yield of 5.9%.
In any case, both stocks appear to be super cheap and oversold, with the analyst consensus price target calling for a 44% discount in BIP and a 31% discount in BEP. You’re either buying stocks on the way down or on the way up. Just keep in mind that you might have to wait for the next interest rate cut cycle to see substantial upside in these interest rate-sensitive stocks.
The advantage of receiving U.S. dividends in RRSPs
Remember that qualified U.S. dividends usually have a 15% foreign withholding tax if received in non-registered accounts, Tax-Free Savings Accounts, or Registered Education Savings Plans. However, you’ll receive these U.S. dividends in full in an RRSP/Registered Retirement Income Fund. So, you could also consider investing in big-dividend U.S. stocks in your RRSP.
