Canadian savers are using their self-directed Registered Retirement Savings Plan (RRSP) contributions to create wealth portfolios that will complement government and company pensions in retirement.
One popular RRSP investing strategy involves buying top TSX dividend stocks and using the distributions to acquire more shares.
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Power of compounding
Many companies offer a dividend-reinvestment plan (DRIP) that enables shareholders to automatically use dividend payments to buy more shares. Some DRIPs even give a discount of 2% to 5% on the share price to encourage shareholders to buy more stock. This keeps more cash in the business to be used for investments or to pay down debt.
Buying stock with dividends kicks off a compounding process that can turn relatively modest initial investments into meaningful savings over time. Each time the distribution buys new shares, the next dividend payout is larger, which can potentially buy even more stock, depending on the movement of the share price. When dividends grow at a steady pace, the strategy can deliver big rewards.
Fortis
Fortis (TSX:FTS) raised its dividend in each of the past 51 years. The company gets most of its revenue from rate-regulated assets, so cash flow tends to be very reliable and predictable.
Fortis owns $75 billion in utility assets across Canada, the United States, and the Caribbean. The businesses include natural gas distribution utilities, power generation sites, and electric transmission networks.
Fortis grows through a combination of strategic acquisitions and internal development programs. The current $26 billion capital plan is expected to increase the rate base from $39 billion in 2024 to $53 billion in 2029. As the new assets are completed and go into service, the boost to earnings should support the company’s plan to raise the dividend by 4% to 6% per year for the next five years.
Additional projects are under consideration that would extend the outlook for rate-base and dividend growth. Fortis hasn’t completed a major acquisition for several years, but falling interest rates could trigger a new wave of consolidation in the utility sector.
Investors who buy FTS stock at the current level can pick up a dividend yield of 3.7%. The company currently offers a 2% discount on shares purchased using the DRIP.
A $10,000 investment in FTS stock 30 years ago would be worth more than $330,000 today with the dividends reinvested.
Enbridge
Enbridge (TSX:ENB) spent US$14 billion in 2024 to buy three American natural gas utilities. The deals made Enbridge the largest natural gas utility operator in North America. Enbridge also has an extensive network of natural gas transmission and storage assets across Canada and the United States. Natural gas demand is expected to increase in the coming years as new gas-fired power plants are built to provide electricity for artificial intelligence data centres.
Enbridge has also expanded into energy exports. The company bought an oil export terminal in Texas and is a partner in the Woodfibre liquified natural gas (LNG) export facility being built in British Columbia.
The legacy oil pipeline operations remain strategically important for the Canadian and U.S. economies. Enbridge moves about 30% of the oil produced in the two countries.
Contributions from recent acquisitions, along with the current $28 billion capital program, should drive earnings growth over the coming years to support steady dividend increases. Enbridge raised the distribution in each of the past 30 years. Investors who buy ENB stock at the current price can get a dividend yield of 5.9%.
A $10,000 investment in ENB stock 30 years ago would be worth about $630,000 today with the dividends reinvested.
The bottom line
There is no guarantee the next 30 years will deliver the same returns, but Fortis and Enbridge still look attractive and deserve to be part of a diversified portfolio focused on dividend-growth stocks. The TSX is home to many great dividend stocks that have delivered strong long-term returns for investors.
