It’s a good idea to invest money you don’t need for a long time in your Registered Retirement Savings Plan (RRSP) because your RRSP investments are allowed to grow tax-deferred. Therefore, the goal is to maximize growth for your RRSP because ultimately when you withdraw from it, the income will be taxed like your job’s income – at your marginal tax rate.
The stock market historically offers the greatest long-term growth. What are some of the best stocks for your RRSP? You should consider owning U.S. dividend stocks in your RRSP/RRIF to avoid the 15% withholding tax on the foreign dividend that would otherwise be applied in other accounts, such as non-registered accounts, Tax-Free Savings Accounts (TFSA), Registered Education Savings Plans (RESP), and so on.
Realty Income offers good monthly income
Just like Canadian real estate investment trusts (REITs), U.S. REITs are also a good place to explore for income. As a prime example, retail REIT Realty Income (NYSE:O) is popular for monthly income, particularly after it has sold off due to higher interest rates. As a result, its dividend yield is meaningfully higher and its valuation is lower than the 2022 levels. Furthermore, it’s rare to see a U.S. REIT with an A-grade credit rating (Realty Income’s S&P credit rating is A-.).
On its website, Realty Income states that it “is committed to providing our shareholders with dependable monthly dividends through maintaining a conservative capital structure and prudently planning for the sustainable growth of our platform. With over 55 years of real estate investing experience, we are proud of our track record that demonstrates an understanding of resilient quality that generates value for years to come.”
Indeed, its monthly dividend seems reliable. First, it has increased its dividend for about 26 consecutive years. Second, its funds from operations payout ratio is estimated to be sustainable at about 74% this year. For your reference, its 5-, 10-, and 15-year dividend growth rates are 3.7%, 3.9%, and 4.4%, respectively. And its monthly dividend is 3.2% higher compared to a year ago.
Under a normal scenario, the stock can deliver total returns of more or less 11% over the next five years, including the 5.7% dividend yield that it offers today. If we enter an interest rate cut cycle, the stock could trade even higher, delivering greater total returns of 12 to 15%.
Do you want a more secure dividend?
A general rule to obtain a more secure dividend stream is to buy stocks that have lower dividend yields but are growing their dividends at a faster pace. Here’s a US stock as an example – Pepsi (NASDAQ:PEP) could be a good buy after pulling back north of 12% from its high last year. At writing, it trades at $171.42 per share, which brings it to a price-to-earnings ratio of about 22.5, which is reasonable for the international consumer staples stock.
Although it only offers a dividend yield of just under 3%, it has been growing its dividend by 7.6% per year over for the last 15 years. Its dividend hike last year was 10%. And you can count on the beverage and snack company to potentially raise its dividend by 8 to 10% in May, lifting its current yield to about 3.2%. Over the next five years, investors can expect total returns of around 11% per year.
