Shares of TransCanada Corporation (TSX:TRP)(NYSE:TRP) are down 27% over last 12 months, and investors with a taste for yield are wondering if this is the right time to start a position in the stock.

Let’s take a look at the situation to see if TransCanada is a good fit for your dividend portfolio.


TransCanada reported decent Q2 2015 net income of $429 million, or $0.60 per share. That was pretty much in line with the results from the same quarter in 2014. Investors like to see constant earnings growth, but a flat year-over-year quarter isn’t bad in the current environment.

TransCanada operates in three core segments. The natural gas pipeline business is its largest, but the company is also expanding its liquids pipelines portfolio. The remaining division is focused on electricity production.

All three groups delivered solid results in the second quarter, and that trend should continue.

Big capital projects with big problems

In order to increase cash flow and pay higher dividends, TransCanada has to build more pipelines and get them filled up with gas, oil, or gas liquids.

The company currently has about $46 billion in new projects in the works, but a large part of the portfolio is tied up in two massive liquids pipelines: Keystone XL and Energy East.

Keystone’s troubles are well documented. The company already built the second leg of the system and is generating solid returns from that investment, but the northern portion is still in limbo.

President Obama is unlikely to approve the US$8 billion project, so TransCanada and its investors will have to wait for the next administration come in before it sees any movement on the issue. At this point, investors should probably consider Keystone a bonus when evaluating the stock.

Energy East is the $12 billion pipeline that TransCanada wants to build to carry western Canadian oil to east coast refineries. The company already has binding contracts in place for about 90% of the pipeline’s capacity, so it just has to find a way for the governments of all the affected provinces and the federal government to come to some kind of agreement and clear the way for construction to begin.

Right now the political situation doesn’t look so good for TransCanada. The provinces are bickering about risks, costs, and revenue sharing, and the tight race in the federal election suggests the country is headed for a minority government, and that could make things more difficult.

At some point, I think at least one of the two major projects will go ahead. It just isn’t going to happen on the timeline hoped for by TransCanada and its customers.

Small projects with great cash flow

The media attention focuses heavily on the big projects, but TransCanada is quietly moving along nicely on $12 billion worth of smaller pipelines that are expected to be in service by 2018.

Dividend growth

TransCanada has a solid history of dividend growth, and the company recently announced plans to increase the distribution by 8-10% per year until the end of 2017. That’s what dividend investors like to hear!

The current distribution of $2.08 per share yields a tidy 4.9%. The payout is very safe, and investors who buy the stock now will see their yield move even higher as the dividend increases in the next few years.

Should you buy?

Despite the troubles with the big projects, the stock looks attractive and any positive news on Keystone or Energy East could send the shares much higher. If you have a bit of cash on the sidelines, this is probably a good time to start a position in TransCanada.

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Fool contributor Andrew Walker has no position in any stocks mentioned.