Building wealth inside a self-directed Registered Retirement Savings Plan (RRSP) is possible to do over a short period of time by hitting home runs on volatile stocks, but this is a very risky strategy to undertake with your retirement funds.
Another popular approach involves buying top dividend-growth stocks and using the distributions to acquire new shares over the course of two or three decades.
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Power of compounding
Dividend reinvestment takes time to deliver results. The idea is that every dividend payment that buys new shares creates an even larger distribution on the next payment. Over time, the snowball effect can have a profound impact on a portfolio. That being said, the strategy requires patience and the discipline to ride out market turbulence.
Pullbacks in share prices enable the buying of more shares with the dividend income, helping reduce the average cost while boosting yield. Sometimes great dividend stocks go through long slumps, so it is important to stay the course with the goal of reaping the rewards on the rebound.
The best stocks to buy for this strategy tend to be ones that have long track records of dividend growth. A steady increase in the dividend drives up the yield on earlier share purchases and normally leads to a higher share price over the long run. High yields are attractive, but dividend growth should be the main investing focus with a decent yield being the bonus.
Fortis
Fortis (TSX:FTS) is a good example of a dividend growth stock investors can own for decades. The board has increased the distribution in each of the past 50 years and management intends to boost the payout annually by 4% to 6% through at least 2028. This is good guidance in an uncertain market.
Fortis is working on a $25 billion capital program that is expected to drive the rate base from $37 billion in 2023 to more than $40 billion in 2028. As the new utility assets go into service, the resulting boost to cash flow should support the dividend program. Fortis has other projects under consideration that could be added to the mix. The company also has a history of making strategic acquisitions to expand its utility portfolio.
Fortis trades near $56.75 at the time of writing. The stock is above the 12-month low near $50, but is still way off the $65 it reached in 2022. As interest rates decline there should be added support for an upward move in the share price. Lower interest rates will cut borrowing costs to help push up profits.
Investors who buy FTS stock at the current price can get a 4.2% yield.
Enbridge
Enbridge (TSX:ENB) offers a long history of dividend growth combined with an attractive yield. The board increased the dividend in each of the past 29 years. Investors who buy Enbridge at the current price near $50.50 can get a 7.2% dividend yield.
Enbridge is known for its vast oil pipeline transmission network. The company moves about 30% of the oil produced in Canada and the United States. This makes Enbridge’s infrastructure strategically important for the smooth operation of the economies of the two countries. Getting new major pipeline projects approved and built is very difficult while oil demand in the domestic and international markets remains solid. As such, the value of the existing infrastructure should increase over time.
Enbridge shifted its growth strategy to focus on energy exports, utilities, and renewable energy. The company owns the largest oil export terminal in Texas and is a partner on the Woodfibre liquified natural gas (LNG) facility being built in British Columbia. Enbridge also owns solar and wind developers and is expanding its renewables assets in North America and Europe.
Another opportunity is hydrogen fuel mixed with natural gas to reduce emissions. Enbridge’s extensive natural gas transmission networks and distribution businesses position the firm well to benefit from a shift to hydrogen, if it materializes.
Enbridge has a $25 billion secured capital program on the go that will help drive distributable cash flow (DCF) growth of 3% to 5% over the coming years. This should support ongoing dividend increases.
The bottom line on RRSP investing
Fortis and Enbridge are just two TSX stocks that have delivered long-term dividend growth and attractive total returns for RRSP investors. Future gains might not be the same as those generated in the past, but these stocks look cheap at their current levels and deserve to be on your radar for a diversified RRSP portfolio.
