Canadian investors are always on the lookout for stocks that have the potential to generate consistent returns. When you invest in the stock market, it is advisable to take a long-term view and benefit from compounded gains. So, it means you should identify companies that can increase revenue and earnings across economic cycles.
It makes sense to identify blue-chip, dividend-paying stocks for your portfolio. Companies that pay dividends typically generate a steady stream of cash flows, allowing them to distribute a portion of it to investors.
Further, if you hold dividend stocks in a TFSA (Tax-Free Savings Account), you don’t have to pay a single dollar to the Canada Revenue Agency when you withdraw your capital gains or dividends.
We’ll take a look at two blue-chip stocks on the TSX that should be a part of your portfolio today.
One of Canada’s largest utility companies, Fortis (TSX:FTS)(NYSE:FTS) is also a Dividend Aristocrat. Fortis has increased its dividends for 47 consecutive years showcasing its recession-proof business model. Its forward yield stands at 3.7%, and the company forecasts it will increase dividend payouts at an annual rate of 6% through 2025.
Valued at a market cap of $25.6 billion, Fortis is forecast to increase sales by 7.2% to $9.58 billion in 2021 and by 4.9% to $10 billion in 2022. Analysts also expect it to expand earnings 7.8% to $2.77 per share in 2021 and by 6.5% to $2.95 per share in 2022. It means Fortis stock is trading at a forward price-to-sales multiple of 2.67 and a price-to-earnings multiple of 19.9, which might look steep for a utility company.
However, Bay Street views the stock as undervalued and has a 12-month price target of $60, which is 9% higher than the current trading price. After accounting for its dividend yield, total returns will be closer to 13%.
Fortis expects to increase its rate base from $30.5 billion in 2020 to over $40 billion in 2025, allowing it to increase cash flows and support future dividend increases.
Algonquin Power & Utilities
Another dividend-paying stock on the TSX that you can consider right now is Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN), which has a forward yield of a tasty 4.5%. AQN derives two-thirds of its revenue from rate-regulated electric, gas, and water utility businesses, and the rest comes from renewable energy generation.
In the last decade, Algonquin has increased its dividends at an annual rate of 10%. Further, in the next five years, the company expects to grow its adjusted earnings between 8% and 10% on an annual basis. It also plans to invest $9.4 billion in capital projects, of which $3.1 billion will be deployed in its renewable energy segment.
These capital investments should increase cash flows and drive profit margins higher in the upcoming years, making AQN the perfect dividend-growth stock on the TSX today.
Valued at a market cap of $11.34 billion, AQN is forecast to increase sales by 29.6% to $2.17 billion in 2021 and by 13.9% to $2.48 billion in 2022. Analysts also expect it to expand earnings by 10% to $0.70 per share in 2021 and by 16% to $0.81 per share in 2022. It means AQN stock is trading at a forward price-to-sales multiple of 5.22 and a price-to-earnings multiple of 26.5, which is higher than Fortis. But Algonquin is also increasing its income and profit margins at a higher pace and demands a higher valuation.