Canadian investors are searching for reliable dividend-growth stocks to add to their TFSA portfolios.
The strategy makes sense, especially when the distributions are invested in new shares. This sets off a powerful compounding process that can turn a modest initial investment into a nice nest egg over time.
Let’s take a look at Fortis Inc. (TSX: FTS)(NYSE: FTS) and Telus Corporation (TSX: T)(NYSE: TU) to see if they are interesting picks right now.
Fortis
Fortis reported first-quarter 2018 net earnings of $323 million, or $0.77 per share, compared to $294 million, or $0.72 per share, in the same period last year.
Strong performances from two large acquisitions made in the United States in recent years supported the earnings growth. The company spent US$4.5 billion to buy Arizona-based UNS Energy in 2014 and acquired Michigan-based ITC Holdings for US$11.3 billion in 2016.
Looking ahead, Fortis has a five-year $15.1 billion capital plan in place that should increase the rate base to $33 billion. In addition, management is looking at organic growth opportunities.
As a result, Fortis expects revenue and cash flow to increase enough to support annual dividend hikes of at least 6% through 2022.
Most of the company’s revenue comes from regulated assets, and Fortis has raised its dividend every year for more than four decades, so investors should feel comfortable with the guidance.
At the time of writing, investors can pick up a 4% yield.
A $10,000 investment in Fortis 20 years ago would be worth about $80,000 today, with the dividends reinvested.
Telus
Telus has avoided the temptation to invest billions in media assets. Some pundits say that will be a long-term negative for the stock, but Telus appears to be doing quite well without a portfolio of TV channels, radio stations, and sports teams.
The company continues to add new TV, internet, and wireless subscribers at a steady clip, supported by a strong focus on customer service and significant investments in state-of-the-art broadband technology.
Telus regularly reports the industry’s lowest postpaid mobile churn rate and has reported 29 straight quarters of average revenue per user growth on a year-over-year basis.
The company expects 2018 free cash flow to be as high as $1.4 billion in 2018 and intends to raise the dividend by 7-10% this year. The company raised the payout by 7% in 2017, and that followed dividend growth of about 10% per year for the previous six years.
At the time of writing, the stock provides a yield of 4.4%.
A $10,000 investment in Telus just 15 years ago would be worth about $75,000 today with the dividends reinvested.
Should you buy?
Both Fortis and Telus have long track records of dividend growth and tend to be less volatile when the market hits a speed bump. The two companies might not be overly exciting, but they generate steady returns for buy-and-hold investors who want to sleep well at night.
If you have some cash on the sidelines, I would probably split a new investment between the two stocks.
