Income investors are always searching for top-quality dividend stocks to put inside their TFSA portfolios.
With stock markets hitting new highs, the pickings are getting slim for fairly valued dividend kings, but there are a few deals out there that offer growing payouts and a shot at some nice upside.
Let’s take a look at TransCanada Corporation (TSX: TRP)(NYSE: TRP) to see why it might be an interesting pick today.
Oversold?
TransCanada’s stock currently trades at a 12-month low, as investors fret about rising interest rates and a battle the company is fighting with natural gas producers in Alberta.
Higher interest rates can trigger a shift of funds from dividend stocks to fixed-income alternatives. As a result, some investors might be exiting TransCanada and other go-to dividend stocks ahead of a potential ramp-up of interest rate increases.
GICs are paying a bit more than they were a year ago, but it will be quite some time before they offer the 4.4% you can get from TransCanada.
On the natural gas side, the stock has taken a hit recently amid concerns about a battle over the company’s North Montney Mainline natural gas project that would bring B.C. gas into Alberta to connect with TransCanada’s NOVA Gas Transmission system.
Alberta producers are worried there won’t be enough capacity to move all the gas out of Alberta, and that could hurt already depressed prices.
TransCanada says it has plans in place to expand capacity throughout the Alberta system. The issue is getting some headlines, but the market might be overreacting when it comes to TransCanada’s share price.
At the time of writing, the stock trades at $56.50 per share, which is down from a high of $64 in November.
Dividend growth
Management expects cash flow to improve enough to support dividend growth of at least 8% per year through 2020, as it completes $24 billion in near-term projects.
Should you buy?
TransCanada has a strong track record of raising its payout, so investors should feel comfortable with the guidance.
In addition, there is a chance the Keystone XL pipeline will finally get built and that could provide a nice boost to cash flow and the dividend beyond 2020.
If you have extra cash to put into a dividend stock, TransCanada might be an attractive contrarian pick today.
