Canadians are searching for ways to build retirement savings inside a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). One popular strategy involves owning top TSX dividend stocks and using the distributions to acquire new shares.
Power of compounding
When dividends are reinvested to buy more shares the next dividend payment is larger and can potentially buy even more new stock, depending on the movement of the share price. Over time, the compounding effect can turn a relatively small initial investment into a meaningful savings fund for retirement. This is especially the case when the company raises the dividend at a steady pace and the stock price drifts higher.
The investing strategy requires commitment and patience. Pullbacks in the market are going to occur and sometimes the correction is significant, but these events enable the investor to get a better price on stock purchased using the dividends.
Dividend-reinvestment plan
Many companies have dividend-reinvestment plans (DRIPs) that allow investors to use dividends to buy more stock without incurring a fee for the transaction. In some cases, a discount is offered on the price. Businesses do this to keep cash in the company that can be used to reduce debt or invest in growth initiatives.
Fortis
Fortis (TSX:FTS) is a good example of a top Canadian dividend-growth stock that has delivered attractive long-term returns for investors. The company has increased the dividend annually for the past 50 years and intends to boost the payout by at least 4% per year through 2028.
Fortis owns $66 billion in utility assets located across Canada, the United States, and the Caribbean. The company gets nearly all of its revenue from rate-regulated businesses. This means revenue and cash flow tend to be predictable and reliable. Power-generation facilities, electric transmission networks, and natural gas utilities are all part of the asset mix.
Fortis grows through development projects and acquisitions. The current $25 billion capital program is expected to boost the mid-year rate base from $36.8 billion to $49.4 billion over five years. This should support the planned dividend increases.
Fortis offers a 2% discount on the shares purchased through the DRIP. Investors can normally ask their online broker service to automatically enrol in the DRIP of the stocks held in the TFSA or RRSP portfolio.
Long-term investors have done well with Fortis. A $10,000 investment in FTS stock 20 years ago would be worth about $77,000 today with the dividends reinvested.
The bottom line on building retirement wealth
Fortis is just one example of a top Canadian dividend stock that has helped investors build wealth for their golden years. There is no guarantee the next 20 years will deliver the same returns, but Fortis still deserves to be on your radar today. The strategy of buying top dividend-growth stocks and using the distributions to acquire new shares is a proven one for building long-term savings.
