Young Canadian investors are using their self-directed Tax-Free Savings Account (TFSA) to build retirement portfolios. One popular investment strategy involves buying top Canadian dividend stocks and using the distributions to acquire new shares.
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Power of compounding
Each time dividends are used to buy new shares, the next dividend payment increases. Depending on the movement of the share price, this can potentially buy even more shares. It is a bit like rolling a snowball to make a snow boulder. At the start, the impact is small, but the compounding effect can be substantial over time, especially when dividends increase at a steady pace and share prices trend higher.
Top Canadian dividend stocks
Dividend growth is generally more important than dividend yield when building a retirement portfolio focused on total returns. In the current market environment, it makes sense to search for stocks with long track records of paying distributions through all parts of the economic cycle.
Fortis
Fortis (TSX:FTS) raised its dividend in each of the past 51 years. This is a big reason the stock price has steadily drifted higher over the long haul.
Fortis operates $75 billion in utility assets across Canada, the United States, and the Caribbean. The businesses include power generation facilities, electric transmission networks, and natural gas distribution utilities. Nearly all of the revenue comes from rate-regulated assets. This means cash flow tends to be reliable and predictable.
Fortis is working on a $26 billion capital program that will increase the rate base from $39 billion to $53 billion over five years. As the new assets are completed and go into service, the boost to earnings should support planned annual dividend increases of 4% to 6% through 2029. Investors who buy FTS stock at the current level can get a dividend yield of 3.7%.
Bank of Montreal
Bank of Montreal (TSX:BMO) has paid a dividend every year for nearly two centuries. The bank is a good way for Canadian investors to get exposure to economic growth in the United States through a TSX bank stock. Bank of Montreal has built a large U.S. presence over the past 40 years through a series of strategic acquisitions. The timing of the deals might not always be perfect, but the long-term benefit for shareholders has so far worked out for the bank.
BMO stock trades near $144 per share at the time of writing. It isn’t as cheap as it was early last month, but it should still be a solid holding for a diversified TFSA pension portfolio. Investors who buy the stock at the current level can get a dividend yield of 4.4%.
Enbridge
Enbridge (TSX:ENB) raised its dividend in each of the past 30 years. The company is a giant in the North American energy infrastructure industry, moving roughly 30% of the oil produced in Canada and the United States and 20% of the natural gas used by Americans. Enbridge diversified its assets in recent years through a string of acquisitions. It added an oil export terminal in Texas, purchased a stake in the Woodfibre liquified natural gas (LNG) export facility being built in British Columbia, and beefed up its wind and solar division. In 2024, Enbridge acquired three natural gas utilities in the United States.
The company is working on a $28 billion capital program to drive additional revenue and cash flow growth. This should support steady dividend increases in the next few years. Investors who buy ENB stock at the current level can get a dividend yield of 5.9%.
The bottom line
Fortis, Bank of Montreal, and Enbridge pay good dividends that should continue to grow. If you have some cash to put to work in a TFSA retirement portfolio these stocks deserve to be on your radar.
