Build Dividend Income While Waiting for Constellation Software Inc. (TSX:CSU) to Pull Back More

Constellation Software Inc. (TSX:CSU) is one of the best TSX stories in the last five years. While you wait for a bigger pullback, hunt for some safe dividend income.

| More on:

Growth stocks are not common on the TSX, but Constellation Software Inc. (TSX:CSU) has to be considered one of the best TSX stories in the last five years. It has outperformed the S&P 500 by a large margin. It explains why investors are willing to pay an insanely high multiple to own this software stock. Unlike many companies that crashed during the 2001 tech bubble, Constellation actually makes money quarter after quarter.

I missed my chance to pick up shares in April when the price dropped. The stock then ran up considerably and gave some of that price back with a single-day 2.5% drop this week. I will wait for more of a pullback; meanwhile, hunt for some safe dividend income.

Renewable energy exposure and a huge dividend

TransAlta Renewables Inc. (TSX:RNW) is a company involved in a mixed-bag production of wind, hydro, and fossil fuel energy sources. I covered this stock when I surveyed some TSX green stocks.

Nothing has changed dramatically since I last reviewed TransAlta. Is this a good and bad sign? You decide.

Good signs: The stock has traded sideways for one whole quarter, allowing the price multiples to drop. The stock is also showing positive price momentum, when the price broke the 200-day moving average on June 4 and retested a support level 10 days later. These are good technical signs.

Bad signs: Revenue from wind and hydro, the “renewable” part of the business, which is roughly two-thirds of TransAlta’s energy production, remains flat. Meanwhile, the price-to-sales ratio is very high for a conventional energy stock. I am not sure what an appropriate multiple would be for this hybrid energy company, but I would argue you are paying up for the natural gas part of the business.

Long term, I am lukewarm. As a short-term play, I am relatively bullish. Collecting $0.0783 per share each month is enticing. Hold this stock for a whole year, and you’ll generate over 7% in income.

Favour a sure dividend from an insurance company?

Industrial Alliance Insur. & Fin. Ser. (TSX:IAG) is the fifth-largest insurance company on the TSX by market cap. Like TransAlta, it also employs a hybrid business with wealth management as another side to its business, with $34 billion invested for its clients, primarily in the bond market.

From a technical point of view, I really like IA Financial at these levels, more so than TransAlta. Earlier this year, IA Financial was listed as a top stock pick for the month.

You’ll need to hold IA Financial for longer than TransAlta to get the same income, more than twice as long in fact, but the payout ratio is also massively lower at 29%. Parking cash in IA Financial is just a titch riskier than a GIC, in my opinion.

The market has priced in the news that long standing president & CEO is stepping down, with the successor to start in September. There are a few reasons I think this uncertainty will not affect shareholder confidence. The company is trading at book value, it has rebounded with positive free cash flows, and it has above-average 11.5% return on equity for this sector.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Brad Macintosh has no position in any of the stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »