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One proven strategy to build long-term wealth is to create alternative income streams. Canadians can consider investing in blue-chip dividend stocks, allowing them to benefit from a recurring and stable stream of passive income.
The ongoing volatility surrounding the equity markets has dragged valuations of companies across multiple sectors lower, increasing their dividend yields in the process. Here are two of my favourite passive-income stocks in October 2023.
Fortis stock
Valued at a market cap of $26.5 billion, Fortis ended the second quarter (Q2) with $64 billion in assets. Armed with 10 electric and gas utility operations, Fortis serves more than three million customers in North America.
As one of the largest utility companies in Canada, Fortis enjoys predictable cash flows across market cycles, allowing it to increase dividends for 50 consecutive years. Fortis expects to spend $25 billion in capital expenditures between 2024 and 2028, which should widen its base of cash-generating assets and drive future cash flows higher.
Fortis currently pays shareholders an annual dividend of $2.36, indicating a yield of 4.3%. It expects to raise dividends between 4% and 6% annually through 2028. In the last 28 years, these payouts have risen by 6.5% annually.
Fortis emphasized its five-year capital plan is low risk as funds will be deployed towards regulated investments and major capital projects. Around 27% of the five-year capital plan is allocated toward clean energy investments focused on connecting renewables to the grid, with energy storage investments in Arizona and the Caribbean.
This capital plan should increase the midyear rate base for Fortis from $36.8 billion in 2023 to $49.4 billion in 2028, indicating a compound annual growth rate of 6.3%. Fortis explained its operating cash flow and debt will fund the expenditure.
Priced at 18 times forward earnings, Fortis stock trades at a discount of 8% to consensus price target estimates.
Innergex Renewable stock
The second TSX dividend stock on my list is Innergex Renewable (TSX:INE), which currently offers a dividend yield of 7.5%. Innergex operates as an independent renewable energy producer and owns and operates facilities in Canada, the U.S., France, and Chile. Innergex operates hydroelectric facilities, energy storage facilities as well as wind and solar farms. It ended Q2 with 84 facilities with a net installed capacity of 4,184 megawatts.
In August 2023, Innergex entered an agreement to form a partnership with Credit Agricole Assurances. According to the terms of this partnership, Credit Agricole will hold a 30% minority interest in Innergex’s portfolio in France for $188.4 million.
The proceeds will be used to reduce revolving credit facilities for Innergex and reduce its debt obligations amid a rising interest rate environment.
Innergex stock trades 70% below record highs as investors are worried about the company’s high payout ratio and the possibility of a dividend cut. In the last 12 months, Innergex reported a free cash flow of $115.3 million compared to $173.6 million in the year-ago period. Comparatively, it paid dividends amounting to $147 million in the last year, indicating a payout ratio of 127%.
Priced at 34 times 2024 earnings, INE stock trades at a discount of 90% to consensus price target estimates.
