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TFSA Investor Alert: Create a Monthly Retirement Stream of $5,000 With This All-Star Utility Stock

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I have a lot of friends who obsess over creating stable retirement income streams and a lot of them look at buying condos in the downtown core of Toronto. I always think that buying a condo for the purpose of being a landlord has a lot of costs and efforts associated with it.

The math also doesn’t quite work, because if a $600,000 condo rents out at $2,500 a month in rent, it equates to a gross revenue stream of $30,000. This $30,000 is essentially a dividend but you also have to factor in wear and tear costs and “fixing the toilet” costs, not to mention condo fees and property taxes.

Once you net off all these costs, you could be looking at a $20,000 net rent on the $600,000 investment, which equates to a true “dividend equivalent” of 3.3%. Sure, there is a healthy capital gain every year but that is far from guaranteed and rent doesn’t increase by more than 2% to 3% per year.

I think there is a much smarter way to create a stable dividend stream with less risk and better growth prospects and that way is to invest in Capital Power Corp (TSX:CPX), one of the most growth-oriented clean power producers in North America.

I am not saying one should go out and get $750,000 worth of Capital Power stock, but I want readers to have choices and create a great basket of dividend growing, stable investments that can do much better than a condo.

Successful geographical diversification

Capital Power used to be very much focused on Alberta a few years ago and it realized the hard way that diversification is critical to its future success. So it set about charting a pathway to growth in the U.S. and other parts of Canada and I am happy to report that the company is on track to have 50% of its assets in the U.S. and other parts of Canada.

This is very important because it speaks to the company’s ability to execute. When we think of infrastructure stocks, we are talking about significant upfront capital investments and expensive project financing. This means that bad execution can have significant financial consequences including really lumpy cash flows. Investors usually worry about that sort of thing a lot, so any proof point of good execution is worth its weight in gold.

Predictable dividend growth

My regular readers know that I am a huge fan of companies that can grow their dividends in a predictable fashion over time and create a great track record for shareholders to see. Capital Power checks all the boxes on this front as it has grown its dividend from $1.26 in 2013 to $1.92 in 2019.

But the gravy train doesn’t stop there. Capital Power has already very publicly told its investors that it will be further growing its dividend in 2020 and 2021. Not only that, but it has also told investors the precise amounts for the 2020 and 2021 dividends. Honestly, the cash flow visibility doesn’t get any better than this and investors will be able to count on a monster $2.19 annual dividend.

Assuming the current stock price of $31, the dividend yield equates to 7%. I am going to repeat that because this yield is that good. It is a full 7% and most of this yield is low-risk and contracted for the long term, which means there is no risk of it disappearing like a condo tenant could with a moment’s notice.

Capital Power has grown its dividends at a rate of 7% from 2013 to the future 2021 dividend, which is a full 4% greater than the typical annual condo rent increase, which is tied to inflation.

The foolish bottom line

So, for fun’s sake, let’s say that instead of buying a condo, a smart investor plunked the $600,000 into Capital Power stock. At a 7% current yield, that would equate to an annual payment of $42,000 or $3,500 per month.

But wait, let’s remember that the dividend is likely to increase by 7% per year, which means the dividend would be $4,000 per month by 2021 and almost $5,000 by 2024.

Capital Power rarely issues a bad set of quarterly earnings and just puts its proverbial corporate head down and gets on with the boring work of making its investors money every day of the year, including Christmas.

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 Rahim Bhayani has no position in any of the stocks mentioned.

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