The 2022 bear market got a breather, as stock market investors hope the Bank of Canada will slow its interest rate hike to 50 basis points (bps). The short-term recovery also saw some buying in green utility stocks ahead of winter. Almost every year, utility stocks see a short-term growth spurt between November and mid-February. As the temperature drops, your electricity bills rise, and so do utility stock prices. Winter is just beginning, and utility stocks are at the brink of their seasonal rally.
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This TSX utility stock is super cheap now
Algonquin Power & Utilities (TSX: AQN) bottomed out on October 20 near its 52-week low and has surged 5.3% since then. The stock is still very cheap, trading at 13.5 times its forward price-to-earnings (P/E ratio), which is lower than TransAlta Renewables (16.95) and Canadian Utilities (15.15). A P/E ratio tells you how expensive the stock is per dollar of earnings. A low P/E ratio is good if the company’s earnings are growing.
Algonquin’s adjusted net earnings grew at a compound annual growth rate (CAGR) of 11.1% from 2016 to 2021. The company has a $12.4 billion capital plan to develop 3.8 gigawatts of greenfield projects by 2026. Algonquin is also acquiring Kentucky Power, which will be accretive to the former’s 2023 earnings per share (EPS). These projects and acquisitions could grow the company’s EPS faster, making the 13.5 times forward P/E ratio cheaper.
How to make a short-term gain from Algonquin stock
Algonquin’s stock price surged 20-22% to around $22 in the 2020 and 2021 winter rallies. There is a high possibility of the stock repeating history, as electricity prices soar. This time the jump could be even higher, as the stock is trading near its 52-week low.
If you buy 100 shares of Algonquin at the current price below $15, put the sale price as $22. You could make a short-term gain of $700, or 45-47%, by February on a $1,500 investment. But if you continue holding the stock beyond February 10, expect a dip as winter ends. You can buy AQN stock through your Tax-Free Savings Account (TFSA) and save on short-term capital gains tax.
At Motley Fool Canada, we always encourage investors to invest a significant portion of their portfolio in large-cap stocks for the long term. If you make such short-term trades, invest only the money you can risk losing. But with Algonquin, you can even hold it for the long term for its monstrous dividend.
A TSX stock that pays a monstrous dividend
As a utility company, Algonquin enjoys regular cash flows from the monthly electricity, gas, and water bills. The company pays out this cash flow as dividends to shareholders. It has a record of growing its dividends at a 10% CAGR in 11 years.
The market bearishness has pulled Algonquin’s stock price closer to its 52-week low and increased its dividend yield to 6.58%. Now is a good time to lock in a high dividend yield that grows annually. Moreover, Algonquin offers a dividend-reinvestment plan (DRIP) that uses the dividend amount to buy more shares of AQN. The reinvestment won’t give you a cash dividend but will compound your returns by increasing your share count.
How could the returns look in dollar terms? A $500 investment can buy you 33 shares of AQN, which will pay $32.9 in annual dividends. But if you opt for DRIP for five years, your share count could grow to 42 shares, and your annual dividend will amount to $42.4.
Investor takeaway
Like Algonquin, there are many growing dividend stocks in other sectors like telecom, real estate, and banks. Diversify your dividend portfolio across large- and small-cap stocks in different sectors. It is always better to buy a stock when it is trading closer to its 52-week low, as that reduces downside risk and enhances upside gains.
