One popular strategy for building a retirement fund involves buying good dividend-growth stocks and using the distributions to acquire new shares.
Bargain hunters started moving back into oversold dividend stocks in recent months, but many top TSX dividend payers still look undervalued for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
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Fortis
Fortis (TSX:FTS) is a Canadian utility company with $68 billion in total assets spread out across Canada, the United States, and the Caribbean. The company’s businesses include power-generation facilities, electric transmission networks, and natural gas distribution utilities. Nearly all of the revenue is generated by rate-regulated assets. This means cash flow tends to be reliable and predictable. Households and companies need to use electricity and natural gas regardless of the state of their economic situation.
Fortis is working on a $25 billion capital program that will boost the mid-year rate base from $37 billion in 2023 to nearly $50 billion in 2028. The resulting growth in revenue and cash flow should support planned annual dividend increases of at least 4% over this timeframe.
Fortis trades near $55.50 at the time of writing. That’s off the 12-month low of about $50 but is still down from the 2022 high of around $65.
Investors should feel comfortable with the dividend-growth outlook. The board has increased the dividend in each of the past 50 years. Investors who buy FTS stock at the current level can get a 4.25% dividend yield.
TC Energy
TC Energy (TSX:TRP) raised its dividend by 3.2% for 2024. This is the 24th consecutive year of dividend hikes and more should be on the way. TC Energy finished its $14.5 billion Coastal GasLink pipeline late last year. Natural gas is expected to flow through the pipeline from producers to a new liquified natural gas (LNG) export facility starting in 2025. In 2024 the company plans to put $7 billion in new assets into service.
Management is focused on getting the balance sheet back in shape after Coastal GasLink’s costs came in more than double the original budget. The company sold a 40% stake in some American assets last year for US$3.9 billion. TC Energy is on track to monetize another $3 billion in assets this year. In addition, the company intends to spin off the oil pipeline business to unlock added value for shareholders.
Dividend growth should be at least 3% annually over the medium term, supported by the capital programs. TC Energy expects annual net capital investments to trend at $6 billion to $7 billion in the next few years.
TRP stock trades near $53 per share at the time of writing compared to a 12-month low of around $44. The stock was above $70 in 2022, so there is decent upside potential. Investors who buy TC Energy at the current level can get a 7.25% dividend yield.
The bottom line on top dividend-growth stocks
Fortis and TC Energy pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks still look cheap today and deserve to be on your radar.
