After announcing a roughly $5 billion asset sale, on July 27, TC Energy (TSX:TRP) announced another big announcement — its plan to spin off its liquids pipelines business. This news triggered the energy infrastructure stock to fall to as low as $44 per share. The market thought that was a steal! Since then, the big dividend stock has recovered to the $48 level. Still, the stock is 24% lower than a year ago. So, it might still be a good buy here.
The stock price action was weak in 2022, as the stock traded at similar levels at the beginning and end of that year. The volatility was more or less due to high inflation and rising interest rates that increased its interest expense and cost of capital.
Because of the weakness in the stock in the last 18 months or so, the stock’s total return in the last 10 years was only 5.2% per year. Essentially, investors got about 96% of their returns from the dividend. This shows the importance of safe dividend income.
Reliable dividends
TC Energy stock has been a source of reliable dividend income for years. A stable stream of favourably taxed dividends is valuable for income investors in any economic environment. For example, the quarterly income can be used to pay your internet or utility bill. TC Energy stock pays out eligible dividends that are taxed at a lower rate than your job’s income thanks to the dividend tax credit. This accounts for shares held in non-registered or taxable accounts.
If you were a Canadian living in Ontario and earn $65,000 a year, the marginal tax rate on $1,000 of your job’s income is $296.50 but only $63.90 for eligible dividends of $1,000. Other Canadian investors get substantial tax savings on earning eligible dividends as well. So, it would be smart to incorporate dividend stocks in your diversified investment portfolio.
TC Energy has been paying increasing common stock dividends for about 22 consecutive years. Its 10-year dividend-growth rate is about 7.4%. Although its recent dividend-growth rate has fallen to just north of 3%, the decline in the share price has boosted its dividend yield to close to 7.7%, which is compelling.
What should investors do in light of the spinoff news?
TC Energy’s press release notes the combined dividends of TC Energy and the liquids pipelines business continue to sustain long-term dividend growth. The spinoff is expected to be a tax-free event. So, current TRP shareholders do not have to worry about tax reporting this year, unless they sell in a non-registered account. Given the combined dividend yield of 7.7%, the stock remains attractive for investors seeking current income.
Investors who don’t own the stock today might consider a position in TC Energy after the spinoff when TC Energy will be left with natural gas pipelines and businesses such as nuclear generation and pumped hydro power energy storage. This business is expected to experience higher growth and could be a better long-term hold than the liquids pipelines business that will be spun off. Specifically, management expects a higher comparable earnings before interest, taxes, depreciation and amortization compound annual growth rate of 7% and a 3-5% annual dividend growth.
