Canadian investors are searching for top TSX stocks to put in their self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolios. Many great dividend stocks that have long track records of delivering solid returns rebounded in late 2023 after taking a beating for most of last year. Fortunately, investors who missed the surge can still get some good deals.
Fortis
Fortis (TSX:FTS) is a popular dividend stock for passive income and total returns. The stock trades near $53.50 at the time of writing compared to $50 in early October but still sits well below the $64 it reached in the spring of 2022 before the Bank of Canada and the U.S. Federal Reserve restarted interest rate hikes.
Fortis uses debt to fund part of its capital program, so rising interest rates can hurt profits as borrowing costs increase. This is the main reason the market soured on a number of top TSX dividend stocks across several sectors over the past two years.
Market expectations have shifted to the anticipation of rate cuts by the end of 2024 rather than for more rate increases. The more confident investors become that rates will start to fall in the back half of this year, the more likely it is that Fortis stock will move higher.
At this point, the Bank of Canada has signalled that it is likely to raise rates in its battle to get inflation back down to the 2% target. Rate hikes take time to work their way through the economy, and central banks have to walk a fine line between slowing the economy enough to reduce upward pressure on wages, goods, and services without hammering businesses and households so hard that spending falls off a cliff and the economy plunges into a deep recession.
Inflation came in at 3.4% for December 2023, so there is more work to be done. If inflation remains sticky in this range for several months, the Bank of Canada and the U.S. Federal Reserve might be forced to hold interest rates at current levels into 2025. That would potentially send Fortis and other top dividend names with large capital programs back toward the 2023 lows. As such, investors should keep an eye on bond yields to get a sense of where the market expects rates to go in the coming months. If bond yields start to drift higher again, dividend stocks will probably hit some new headwinds.
Upside
Fortis continues to invest in asset growth through its $25 billion capital program. The rate base is expected to grow by about 6% per year through 2028. This should boost revenue and cash flow enough to support planned annual dividend increases of at least 4%. Fortis has other projects under consideration that could be added to the mix, and acquisitions could also lead to an upgrade in the guidance.
At the very least, investors should feel comfortable with the outlook for distribution growth. Fortis has increased the dividend for 50 consecutive years. At the current share price, the stock provides an annualized yield of 4.4%.
Time to buy Fortis stock?
Fortis pays an attractive dividend that should continue to grow. The stock is probably still undervalued today and should be good to buy for a TFSA or RRSP portfolio. You get paid well to ride out dips, and history suggests that adding more to the holdings during pullbacks tends to be a profitable move over the long run.
