The primary rule for retirement plans is to conserve assets. Whether you use an RRSP or a TFSA for your savings, it’s essential to protect your principal. Growth is important, of course, but if you suffer heavy losses you may never recover them.
Consider this hypothetical example. Suppose you invest $5,000 in an RRSP this year and the plan loses 50 per cent. By year-end, you’re left with $2,500. The next year, your plan grows by 50 per cent. You’re back to break-even, right? No. A 50-per-cent increase from $2,500 takes you up to $3,750. You’re still down $1,250 from your original stake.
This is a simplistic way of looking at retirement savings management, but some people never seem to grasp it. Whenever you’re faced with an investment decision, the first question to ask is: “What’s the risk?” Once you understand that, you can proceed with the decision-making process.
This is a different approach from the one you might use in a non-registered account. If you lose money in that situation, you can at least claim a capital loss, which mitigates the impact. In an RRSP or TFSA, there’s no such relief valve.
This is not to say that you won’t experience short-term losses in a specific investment. Nothing goes up forever. But ask yourself this question: “Is this security likely to be worth more five or 10 years from now than it is today?” If the answer is yes, it’s a candidate for your plan. Remember, you’re investing for the long term. Time is on your side.
Here are three securities to get you started. I would be astonished if they are not more expensive in five years than you’d pay now. Plus, they all offer dividends, thereby adding cash flow to your plan.
Fortis Inc. (FTS-T)
Utility stocks are the perfect security for retirement plans. Most of their income is regulated, which means a steady increase in cash flow to keep up with expenses and ensure the company is viable. A failed utility is unimaginable. Consider the reaction if all the lights went out in your city because the hydro company couldn’t pay its bills. It won’t happen.
We have several good utilities from which to choose in this country including Hydro One, Emera and Canadian Utilities. But I keep returning to Fortis as my No. 1 choice because of its stability, international exposure and its long history (approaching 50 years) of annual dividend increases.
The company is based in St. John’s. It’s a regulated electric and gas utility with 2021 revenue of $9.4-billion and total assets of $64-billion as of Sept. 30, 2022. It has 9,100 employees and serves customers in five Canadian provinces, nine U.S. states and three Caribbean countries.
Fortis released final 2022 results on Feb. 10. The company reported adjusted net earnings of $1.3-billion ($2.78 a share) compared with $1.2-billion ($2.59 a share) in the prior year.
The company recently increased its dividend for the 49th consecutive year. Shareholders received an additional 6 per cent for a quarterly payment of 56.5 cents ($2.26 a year). The shares yield 4.1 per cent at the current price. Fortis says to expect annual dividend increases of between 4 per cent and 6 per cent for the next few years.
Royal Bank of Canada (RY-T)
People complain about bankers being too rich. If you’re one of those people, do what they do. Buy the stock and let the profits roll into your retirement plan.
That’s not to say that banks don’t fail. The collapse of Lehman Brothers in 2008 triggered a massive stock market plunge that contributed to the depth of the Great Recession.
But Canada’s banking system is very different from that of the United States, Britain or almost anywhere else in the Western world. Where else would you find an oligopoly of five banks that basically control the whole system? Yes, there are some bit players, but none has any real clout.
That puts the Big Five in the “too big to fail” category. Royal Bank of Canada tops the list with a market cap of more than $190-billion and is about to get even bigger if its bid to acquire HSBC’s Canadian assets is approved.
Bank stocks didn’t fare very well in 2022. The rapid rise in interest rates, falling equity and bond markets, and recession fears drove investors elsewhere. The S&P Capped Financials Index fell 12.68 per cent for the year.
And what was RBC doing while all this was happening? Posting a profit of $15.8-billion for the year ended Oct. 31, 2022. That was down $243-million or 2 per cent from the prior year, but diluted earnings per share remained unchanged at $11.06.
Meanwhile, RBC announced two dividend increases during the year and now pays $1.32 a quarter ($5.28 a year) to yield 3.8 per cent.
Investors have discovered banks were oversold and are buying back in. The S&P/TSX Capped Financials Index was up 8.95 per cent for 2023 as of Feb. 10. But you can still buy shares in RBC for less than they were a year ago at this time and receive a higher yield as well. What more could you want for your retirement plan?
Canadian National Railway Co. (CNR-T)
Telegraph lines. Iceboxes. Kerosene lamps. Scrub boards.
What do they have in common? All were commonly used in the 19th century. Today they’re museum pieces.
But here’s one 19th-century business that’s still producing big profits: railways. There have been many technological upgrades over time, of course, but it still comes down to an engine pulling a line of cars along a steel track. And doing so very profitably.
Renowned investor Warren Buffett likes railways so much that he bought Burlington Northern and Santa Fe for Berkshire Hathaway. Canadian Pacific is about to assume control of Kansas City Southern. If another railway said it would consider bids, there would be a lineup of potential buyers.
Which brings me to Canadian National Railway. It has been a recommendation of my Internet Wealth Builder newsletter since May, 2002, when we advised buying it at what now seems the absurdly low price of $12.98 (split-adjusted). The shares closed on Feb. 10 at $159.90 for a gain of 1,132 per cent over that time, not including dividends.
While there are occasional dips along the way, a look at CN’s stock chart shows a long, steady upward climb. So it should: This is a company that churns out growing profits year after year.
Despite all the economic headwinds, 2022 was no exception. The company reported annual revenue of $17.1-billion, up 18 per cent from $14.5-billion the previous year. Net income was $5.1-billion ($7.44 per diluted share) compared with $4.9-billion ($6.90 per share) in 2021.
The company is not a big dividend payer in terms of yield. The current quarterly rate is 79 cents ($3.16 a year) for a 2-per-cent yield. But the company has a history of annual dividend hikes, so consider the quarterly payments as a small bonus to the capital-gains potential.
There you have it. With Fortis, RBC and CNR as the core of your retirement savings plan, you’re unlikely to go wrong.