TransCanada Corporation (TSX:TRP)(NYSE:TRP) now offers a 5% yield, and income investors are wondering if this is a good time to pick up the stock.

Let’s take a look at the current situation to see if TransCanada belongs in your dividend portfolio.

Energy markets

The oil rout has chased investors out of any name connected to the energy sector, and TransCanada hasn’t been spared the pain.

The stock is down more than 25% in 2015 and is trading near its 12-month low as oil prices continue to fall. In fact, WTI is now back below $40 per barrel.

TransCanada is essentially a pipeline and storage company with a portfolio of electricity-generation assets to boot.

As energy prices fall, oil and gas producers are forced to cut back on capital spending, and that has an impact on production levels. Lower output means less demand for new pipelines.

As long as oil and gas prices remain under pressure, production growth is going to slow, and that will reduce the expansion rate of pipeline systems in Canada and the U.S.

Project woes

TransCanada has traditionally been a natural gas pipeline company, but management has shifted its focus in recent years to become a major player in the liquids market.

Two of the big projects, Keystone XL and Energy East, have been problematic.

President Obama just rejected the northern leg of Keystone XL, and the US$8 billion project is now on the shelf until a new administration takes control in the United States. If the Democrats win again, Keystone is probably toast.

Energy East is designed to carry western Canadian oil to refineries on Canada’s east coast via a pipeline system that is largely already in place. The $12 billion project would enable Canadian producers to get their oil to better-priced markets.

The new Trudeau government appears to be building strong relationships with provincial leaders, so it will be interesting to see if a deal can be done to get Energy East built. At this point, TransCanada is sticking to its 2020 in-service target, but the company is also saying the cost of the pipeline could increase. Investors should probably give the project a 50/50 weighting when considering the stock.

Positive developments

TransCanada has $11 billion in smaller projects that will be completed and in service by 2018, and new deals keep rolling in, despite the difficult market conditions.

The company just announced a new US$500 million contract to build a natural gas pipeline in Mexico. TransCanada has a strong presence in the country and more projects are planned.

Investors often ignore the company’s electricity-generation portfolio, but the group is growing. TransCanada recently purchased a gas-fired power plant for US$654 million.


TransCanada reported Q3 2015 net income of $402 million, down from $457 million in Q3 2014. Investors never want to see a drop in earnings, but TransCanada is holding up well in a very tough market and cash flow is still strong.

Dividend safety

The stock pays a quarterly dividend of $0.52 per share that yields about 5%. Times are tough in the energy industry, but TransCanada is more than capable of paying the distribution, and investors should see increases to the payout in the coming years as new assets come online and cash flow improves.

Should you buy?

TransCanada is now trading at 17.7 times earnings, which is significantly lower than the five-year average. Opportunities for growth are still out there, and the energy market will eventually recover. I think investors with a buy-and-hold strategy should consider adding the stock to their portfolios.

The #1 dividend-growth stock for 2016?

Our analysts have identified one TOP dividend-growth stock for 2016 and you can download the name, ticker symbol, and price guidance absolutely FREE.

Simply click here to receive your Special FREE Report, "1 Top Dividend-Growth Stock to Buy Now."

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

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