Canadian investors would likely pick a Big Bank or an established energy stock when choosing an anchor holding in their portfolios. That action is logical given that the financial (30.8%) and energy (18.1%) sectors have the most significant percentage weights on the TSX.
The Royal Bank of Canada (TSX:RY) is a solid choice because it’s the country’s largest bank and publicly listed company by asset size. You’d be investing in a bedrock of stability. However, a vital industry player like TC Energy (TSX:TRP) is replacing the Big Bank as my core holding.
Dividend behemoth
The $171.8 billion financial institution boasts a dividend track record of 153 years, but the $53.7 billion pipeline operator is a dividend behemoth. The Big Bank’s dividend offer is 4.41%, while TC Energy pays a juicy 7.18% dividend.
Assuming you invest the same amount ($10,000) in each stock, RBC will generate annual dividend income of $441 compared to TC Energy’s $718. The difference is significant for dividend earners. Price-wise, RBC trades at $123.62 per share (-0.97% year to date), while TC Energy’s stock price is $53.68 (+1.19% year to date).
Sector headwinds
The operating environment in the banking sector is challenging because of stubborn inflation, higher interest rates, and heightened macroeconomic uncertainty. The regional banking sector crisis in the U.S. is another headwind. In Q2 2023, Canadian banks reported lower revenues and income due to higher provisions for credit losses (PCL).
In the three months that ended April 30, 2023, RBC’s net income decreased 14% to $3.6 billion versus Q2 fiscal 2022. Nonetheless, its President and CEO, Dave McKay, said, “Our focused growth strategy, prudent risk and capital management, and diversified business mix exemplify our strength and stability amidst a complex macro environment.” Management also increased dividends by 2%.
Investment thesis
TC Energy’s high-quality portfolio and low-risk utility-like business model are competitive advantages in a highly competitive infrastructure services industry. The synergies across the business segments offer several growth opportunities. Its natural gas pipeline network (58,200 miles) addresses 25% of natural gas demand in North America.
The 3,000-mile-long liquids pipeline system covers 25% of domestic crude oil demand. While the power and energy segment facilities have an installed capacity of 4,300 megawatts (MW). Management said the opportunity-rich, unmatched growth portfolio is a differentiator.
It adds that TC Energy’s strategy has been tested against multiple energy outlooks, including an accelerated energy transition scenario. The assets will remain highly utilized under a broad range of energy transition pathways. In 2022, investments in new projects and several energy transition initiatives reached $8.8 billion.
TC Energy can maximize the full-life value of its long-life assets and has access to a significant runway of future projects. Besides the generous dividend payouts, the dividend growth streak of 23 years is another compelling reason to invest in this energy stock.
No slump for TC Energy
The energy sector remains in a slump due to weak oil prices. Meanwhile, expect TC Energy to leverage its strong competitive position and region-wide footprint to capitalize on future opportunities. This strategy should enable earnings, cash flow, and dividend growth.
