Creating a retirement fund is a long-term investment. The Canada Revenue Agency (CRA) charges a contribution of 5.95% of your salary for 20 years to create a pool that can pay 30% of your last generated income. In a Canada Pension Plan (CPP), you do not have the option of choosing where to invest. You also cannot withdraw from the CPP. If you show similar dedication and invest just 5% of your income in a few dividend stocks, you can generate a higher pension and live a rich retirement.
How Canadian Stocks Can Build Retirement Wealth
I chose a Registered Retirement Savings Plan (RRSP) for three reasons.
- Firstly, it allows you to deduct the amount invested from your taxable income. An incentive like this will encourage you to invest.
- Second, it allows your investment to grow tax-free, meaning compounding returns won't be diluted by taxes.
- Finally, early RRSP withdrawals are subject to tax withholding, which will discourage withdrawals. You can sell the shares and use the proceeds to buy new shares tax-free as long as the money stays inside an RRSP.
Two Canadian Stocks That Have Dividend Fortunes
Now we come to the step of selecting the stocks that can generate wealth in 10 to 15 years. In dividends, a higher dividend growth rate accelerates the compounding effect if the investment is long-term. A higher dividend yield is better if you want passive income immediately or over the next five years. Here are two stocks with a high dividend growth rate.
Manulife Financial
Manulife Financial(TSX:MFC) is known for its insurance and wealth management business. The company manages pension funds for many corporations. It was maintained during the 2008 financial crisis and showed resilience in the face of macroeconomic events. Its dividends have been irregular, and the company did not give any dividend growth between 2010 and 2013 due to a reversal of the financial crisis. However, it revived its business and has been increasing its dividend at an average annual rate of 10.8%.
MFC has sustained such a high dividend growth rate for 11 years and can continue to do so in a strong financial market. The company offers a dividend reinvestment plan (DRIP), which uses dividends to purchase more income-producing Manulife shares each quarter. Its share price growth is low as it increases its dividend by 10%. In 15 years, stocks can significantly increase your passive income.
Cogeco Communications
internet service provider Cogeco Communications (TSX:CCA) has also been increasing its dividend at an average annual rate of 11% over the past 10 years. And despite increasing dividends at such a high rate, the company is paying only 39% of your free cash flow. Cogeco is a small-cap company with a market capitalization of nearly $3 billion. The company is reinvesting some of its cash flows into network expansion to help generate more revenue.
In the digital age, the Internet is the new oil and has ample scope to generate greater regular cash flows. Almost all of its devices will be connected to the Internet, giving Cogeco ample room to expand its business and increase its dividend for another decade or two. The biggest risk is its significant debt. If debt becomes unbearable and starts to eat into net income, you may want to switch to another dividend stock.
Investor Conclusion
Every action carries a risk. Therefore, even in stocks that are bought and held forever, it is important to review its performance and make sure that your reason for being bullish on the stock is intact.