Written by Andrew Walker at The Motley Fool Canada
Canadians are using their self-directed RRSP accounts to build additional savings to support company, CPP and OAS pensions.
With the cost of living skyrocketing, it makes sense to have multiple sources of retirement income. The RRSP has been around for decades and remains a great way to put money aside for the golden years. Contribution room is determined by annual income and calculated by the CRA when you file your tax return each year.
Unused space is carried over, giving people the opportunity to make larger contributions in years when they might be getting more income from a bonus or just having extra money from lower expenses. The best value for your RRSP is in the higher marginal tax brackets, as contributions are used to reduce taxable income.
Waiting too long, however, can lead to missed opportunities to grow savings in a tax-sheltered vehicle while reducing current income tax. Excess cash lying around can also be spent. Once RRSP contributions are made, most people leave the funds to turn into a nice retirement fund.
A balanced portfolio is always recommended. A popular RRSP investment strategy involves owning the best dividend-paying stocks and using the distributions to buy more stocks to increase total returns.
ECB (TSX: BCE)(NYSE: BCE) is the largest communications company in Canada with a market capitalization of $63 billion. Size has an advantage in this market where large investments are needed to ensure networks remain world-class. BCE is expanding its fiber-to-the-premises reach to another 900,000 customers in 2022. The company is also using the $2 billion investment in new 3,500 MHz spectrum it made last year to extend the 5G network.
These investment initiatives help BCE protect its broad competitive moat while preparing the company for additional revenue opportunities from existing and new customers.
BCE announced strong results for the first quarter of 2022 which exceeded the same period last year. The rebound in spending by advertisers in the media division continues after a decline over the past two years. BCE’s media group owns a television network, specialty channels, radio stations and interests in sports teams. BCE’s brick-and-mortar retail stores are also expected to perform better in 2022. On the mobile side, the resumption of business and holiday travel is expected to drive up lucrative roaming charges.
BCE expects free cash flow to increase by 2-10% in 2022. This should guarantee investors another decent dividend increase in 2023. The board has increased the payout for 2022 by 5%. It was the 14th consecutive year that the dividend increase was 5% or more.
BCE’s generous distribution makes it popular with income investors, but the high yield also helps investors who are building up their retirement savings. As of this writing, the stock is yielding 5.3%.
Long-term RRSP investors have done well to own BCE shares. A $10,000 investment in stocks 25 years ago would be worth about $245,000 today with dividends reinvested.
The basics of RRSP investing
the TSX index is home to many outstanding dividend-paying stocks with strong track records of attractive total returns for investors who harness the power of compounding to build a self-directed pension fund. BCE deserves to be on the buy list, but it’s just one example of one of the best Canadian stocks that can help RRSP investors reach their retirement goals.
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The Motley Fool has no position in the stocks mentioned. Fool contributor Andrew Walker owns shares of BCE.