The pullback in the share prices of some of Canada’s top dividend-growth stocks over the past two years is giving investors seeking passive income a chance to get better yields inside their self-directed Tax-Free Savings Account (TFSA) portfolios.
Enbridge
Enbridge (TSX:ENB) is best known for its vast network of oil and natural gas transmission pipelines. The company also has natural gas utilities, export facilities, and renewable energy assets.
Enbridge trades near $49.50 at the time of writing. The stock is actually up about 12% over the past six months but still trades well below the $59 it reached in 2022.
The movement of the stock price over the past two years has largely been driven by the market outlook for interest rates in Canada and the United States. Aggressive rate hikes by the Bank of Canada and the U.S. Federal Reserve in 2022 and 2023 drove up borrowing costs.
Enbridge uses debt to pay for part of its growth projects and acquisitions. Rising borrowing expenses eat into profits and can reduce the cash that is available for payouts to investors. The rebound in the stock over the past six months occurred as markets started to anticipate rate cuts in 2024. Inflation is down from more than 9% in the United States in June 2022 to 3.5% last month. In Canada, it has dropped from 8% to 2.9% over the same timeframe. The central banks want to see inflation trend to 2%, so they are making progress and the next moves will likely be rate cuts to avoid pushing the economy into a recession.
Enbridge is in the process of completing its US$14 billion acquisition of three American natural gas utilities. It also has a $25 billion secured capital program for growth projects. Management expects the new assets to drive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growth of 7-9% through 2026 and 5% beyond that timeline. Distributable cash flow (DCF) is expected to grow about 3% in 2024 and for the next two years and then at a pace of 5% annually after 2026.
This should support ongoing dividend increases in the 3-5% range. The board has increased the dividend for 29 consecutive years. At the time of writing, investors can get a 7.4% dividend yield from ENB stock.
TC Energy
TC Energy (TSX:TRP) is another major player in the North American energy infrastructure industry with 93,000 km of natural gas pipelines, 650 billion cubic feet of natural gas storage capacity, oil pipelines, and power-generation facilities.
Management spent much of 2023 focused on monetizing non-core assets to raise funds to strengthen the balance sheet to help cover the final push to get the $14.5 billion Coastal GasLink pipeline project finished. TC Energy sold interests in American assets to raise $5.3 billion last year. In 2024, asset sales could bring in another $3 billion on top of the planned spin-off of the oil pipelines business.
The company continues to work through its large capital program, with about $8 billion in investments scheduled this year and $7 billion in new assets planned to go into service. TC Energy is targeting annual investments of $6 billion to $7 billion over the coming years.
Management expects comparable EBITDA to be $11.2 billion to $11.5 billion in 2024, up from $11 billion last year. Cash flow growth is forecast to support planned annual dividend increases of 3-5%. TC Energy raised the payout by 3.2% for 2024 and has given investors an annual increase for more than two decades.
At the time of writing, TRP stock trades near $49 per share compared to more than $70 at the peak in 2022. Investors can now get a 7.8% dividend yield.
The bottom line on top stocks for passive income
Enbridge and TC Energy pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA targeting passive income, these stocks deserve to be on your radar today.
