Dividend stocks offer shareholders the opportunity to create a passive stream of income with a low capital base. However, as dividend payouts are not guaranteed, you need to identify companies that can maintain cash flows across market cycles. Moreover, these cash flows should increase over time, which should support further dividend hikes, increasing your effective yield in the process.
Here are two of the best dividend stocks Canadian investors can buy right now.
Capital Power stock
Valued at a market cap of $4.5 billion, Capital Power (TSX:CPX) develops, acquires, owns, and operates renewable and thermal power generation facilities in Canada and the United States. It generates electricity from wind, solar, natural gas, coal, and waste heat. The company owns 7,500 megawatts of power-generation capacity at 29 facilities.
In recent months, interest rate hikes have driven down valuations of capital-intensive sectors due to the rising cost of debt. Shares of Capital Power are down 26% from all-time highs, which has increased its dividend yield to almost 6.5%.
During the company’s second-quarter (Q2) earnings call, Avik Dey, the president and chief executive officer of Capital Power, explained, “As the need for energy only grows, we delivered on our balanced approach and executed on our proven midlife natural gas strategy and buildout of renewables, exceeding our annual $600 million growth target for 2023.”
Its widening base of cash-generating assets has allowed Capital Power to increase its dividend by 6% annually in Q2. In the last 10 years, these payouts have risen by 7% each year, showcasing the resiliency of Capital Power’s cash flows.
Despite the ongoing pullback, Capital Power stock has returned 243% to shareholders after adjusting for dividends since October 2013. The TSX stock is priced at 12 times forward earnings and trades at a discount of 28% to consensus price target estimates.
Whitecap Resources stock
A company operating in the energy sector, Whitecap Resources (TSX:WCP) is focused on the acquisition, development, and production of oil and gas assets in Western Canada. Whitecap pays shareholders an annual dividend of $0.58 per share, indicating a yield of 5.2%.
It benefitted from higher crude oil prices in Q2 of 2023, allowing Whitecap to end the quarter with $197 million of free cash flow after accounting for capital expenditures of $218 million. Comparatively, it paid shareholders a base dividend of $88 million, indicating a payout ratio of just 45%.
In the first six months of 2023, Whitecap generated a free cash flow of $392 million and returned $208 million to shareholders via dividends and buybacks.
The company ended Q2 with a net debt of $1.36 billion and a debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio of 0.6 times, which is not too high. Its EBITDA to interest expense ratio stands at 28.8 times, which suggests Whitecap generates enough profits to repay its debt. Around 60% of Whitecap’s long-term debt is not exposed to interest rate fluctuations.
Whitecap expects to end 2023 with a net debt of $1.3 billion, after which it aims to return 75% of cash flows to shareholders. Moreover, it will increase its dividend by 26% to $0.73 per share once the net debt milestone is reached.
