Coronavirus has decimated the economy. Plenty of seemingly safe dividend stocks are now on the verge of collapse. Real estate or banking doesn’t seem as safe as it did just a few months ago, putting passive income investors in a tough position.
Companies struggling with cash flow issues are quick to suspend dividend payments. Reducing or cutting out dividends is the most convenient way to conserve cash during a crisis.
In order to avoid dividend cuts or sudden loss of capital, focus on companies with robust demand, strong balance sheets and low payout ratios. In other words, focus on companies that are most likely to survive this downturn and keep paying passive income.
Here are two safe dividend stocks I believe you should add to your passive income list.
Safe dividend stock: Fortis
Utility giant Fortis (TSX: FTS)(NYSE: FTS) is the ultimate safe dividend stock. The company’s passive income payouts have been steadily growing for 46 years, which makes it a Canadian Dividend Aristocrat.
This year, the ongoing shutdown has kept people at home, which means residential use of utilities such as electricity could surge. However, Fortis could face a decline in commercial use as the lockdown persists. Regardless, the company is in a strong position to maintain its dividend.
Fortis had $370 million in cash and cash equivalents on its books, which should cover most of the dividend it expects to pay out this year. The company has traditionally paid less than half (48%) of earnings in dividends. It therefore has a buffer to sustain the dividend even if income dips.
While Fortis does have substantial debt on its books, that’s not uncommon for a utility company. Fortis seems like a safe dividend stock for passive income investors in 2020 and beyond.
Safe dividend stock: TransAlta
Another seemingly safe dividend stock is TransAlta Renewables (TSX: RNW). The green energy giant has been on my passive income radar for a few months. I believe the transition to cleaner energy is unabated by the economic damage we’re seeing this year, which makes renewable energy companies like TransAlta much more reliable in these uncertain times.
Calgary-based TransAlta owns and operates 44 different generation sites that collectively produce over 2,500 MegaWatts of electricity — enough to power three million homes across Canada. Of course, the generation sites are spread across the world, which makes TransAlta a global player in this trillion-dollar market.
The firm expects to expand production and acquire new sites in the near future. That should accelerate the top line, even if the rest of the economy struggles. The company has a strong balance sheet with low debt (41% of equity) and robust operating cash flow ($331 million). This safe dividend stock offers an attractive 6.6% dividend yield.
Bottom line
The demand for electricity and green energy shouldn’t be dented by the ongoing shutdown. Consumers will need to pay their bills regardless of the pandemic.
Meanwhile, utility assets should retain their value better than other commercial assets, which makes TransAlta and Fortis safe dividend stocks for passive income investors.
