Are you looking for quality stocks to buy and hold in your RRSP for retirement?
If so, you’ve got a worthy goal. Everybody knows that it makes sense to contribute to an RRSP. However, not everybody understands the importance of investing well within one’s RRSP. If you lose money on your RRSP investments, then you’re better off not having contributed at all, as the RRSP tax-break upon contribution is not worth a whole lot in itself.
In this article, I will explore three high quality Canadian stocks that are worth holding in your RRSP.
Alimentation Couche-Tard
Alimentation Couche-Tard (TSX:ATD) is a high quality Canadian gas station company that has many characteristics of a quality retirement stock. It’s well run, being managed by a team that consistently re-invests the company’s earnings into growing their operation.
Alimentation Couche-Tard stock has been beaten down this year, but for reasons that don’t have a lot to do with the company’s long-term prospects. The company had one bad quarter when its earnings declined because of a temporary dip in oil prices. Later it made a bid for 7/11 that investors found questionable. It looked like ATD was offering a bit too much for 7/11, but the company opposed the offer and is trying to get the Japanese government to prevent it.
Because of these temporary negative developments, ATD stock took a dip this year. The stock trades at under 20 times earnings, which is a very cheap price for a company with an illustrious history like ATD.
CN Railway
The Canadian National Railway (TSX:CNR) is a Canadian railroad company that, like ATD, has taken a dip this year. The reason CN is down this year is because it had a few bad quarters. Most likely, this is a temporary condition. CNR has a great competitive position, with only one major competitor. Its minor competitors, such as trucking companies, cannot compete with it when it comes to shipping bulk goods long distance. They can only compete on smaller orders and shipping to specific locations within cities. So, CNR has a very wide and deep economic moat.
Proof of CNR’s moat can be seen in its profitability metrics. The company has a 32% net income margin, a 15% free cash flow margin, and a 27.5% return on equity. These metrics are all very excellent. The company has also done serviceable growth over the years, compounding its earnings at 9% per year over 10 years. On the whole, I’d be comfortable owning CNR stock.
Fortis
Fortis Inc (TSX:FTS) is arguably Canada’s best-run utility company. It has increased its dividend for 51 consecutive years, which makes it a dividend King. It has grown its earnings by respectable percentages over the last five years and paid dividends along the way. It has been among the best performers on the TSX utilities sub-index over just about any timeframe you can imagine.
I’ve discussed Fortis’ long-term advantages in many past articles. It keeps its payout ratio within reason, it doesn’t borrow too much by the standards of its sector, it invests in equipment upgrades that improve its rate base, etc. These are all long-term positive qualities that Fortis possesses.
Today, Fortis has an extra advantage in the form of declining interest rates. The company has a large amount of debt, which is not a positive in itself. However, when interest rates go down, indebted companies’ earnings increase, as their interest expenses decline. So, Fortis benefits from interest rate cuts like the one the Bank of Canada did this week.
