My 3 Favourite TSX Dividend Stocks Right Now

In uncertain times, patience pays, especially with dividend stocks. But not all dividend stocks are buys in a recession. I would not buy oil stocks, as a recession could impact oil demand. And historical data shows that oil prices fall in every recession. So, if a recession is coming, it is time to rebalance your portfolio. 

My three favourite dividend stocks right now

At present, Suncor Energy has a dividend yield of 4.34%. Suncor profits could earn you $210 in passive income in 2022. In 10 years, the passive income could grow to $342, taking a conservative dividend-growth rate of 5%. 

As the global recession sinks in and slows demand, oil prices could fall. If Saudi Arabia increases the actual oil output, Canadian oil stocks could see a sharp decline, as the former has the power of low production cost. Hence, it is time to safeguard capital appreciation from TSX oil stocks.

If you invested $3,000 in oil stocks in December 2020, your oil portfolio is worth around $6,000 (excluding dividends). You can sell stocks worth $4,000 and buy the below three dividend stocks:

• Canadian Utilities (TSX: CU): 4.63%
• Algonquin Power & Utilities (TSX: AQN)(NYSE: AQN): 5.35%
• BCE (TSX: BCE)(NYSE: BCE): 5.76%

Energy utility stocks bring stable dividends 

Canadian Utilities and Algonquin Power & Utilities provide stability at times of uncertainty. They have regulated services of electricity and natural gas transmission where the base rate is determined by the government. The companies enhance their earnings by reducing the cost of transition through digitization. They have another business segment of energy generation from solar, wind, natural gas, and hydro. 

The energy infrastructure and utility businesses have helped the companies grow their earnings in every macroeconomic cycle. In the past 20 years, Canadian Utilities’s annual earnings fell in four instances but rebounded the next year. This bounce-back has helped Canadian Utilities grow dividends annually for the last 50 years.

Algonquin is relatively new in this arena, but it is growing fast. It increased its earnings per share at a compounded annual growth rate (CAGR) of 11.5% between 2016 and 2021. Another 3.8 GW of renewable projects under the pipeline will drive future earnings. 

The growth of electric and hydrogen vehicles will open new income streams for energy utilities. Canadian Utilities may not give you capital appreciation, but it can give you regular passive income increasing at 8% CAGR. Algonquin can grow passive income at 10% CAGR and give you moderate capital appreciation in the long term. 

The mix of old and young utilities can give your portfolio the cushion of growing dividends and relatively stable stock prices during a recession. 

Telecom utility stocks 

After energy, telecom has emerged as a stable utility. Telecom has been through a huge transition as the cost of building telecom infrastructure pushed many companies out of the market. The top three telecom operators own 91% market share, and BCE commands the largest share by infrastructure. Its peers Rogers Communications and Shaw Communications are amid a merger that is keeping them from tapping the 5G growth. BCE is using this opportunity to expand its 5G infrastructure and has succeeded so far. However, a $30 billion debt on its balance sheet keeps the stock from growing when interest rates are rising. 

Hence, the stock fell 13% in the April selloff induced by rising interest rates. But its stable cash flows of over $7.7 billion give the company enough flexibility to pay dividends, manage debt, and fund capital expenditures. Strong financial management has enabled BCE to pay regular a dividend for over 38 years and grow it annually for 15 years. 

Final takeaway

Booking profit from Suncor Energy and reinvesting in the above three utilities will help you lock in a higher dividend yield for a lifetime. These utilities will pay you dividends, even in a recession, and increase them by more than 5%. In the worst-case scenario, BCE might stall dividend growth until the recession is over, but I don’t see that happening for now.