This Energy Stock Pays You Monthly and Currently Yields 8.4%

Energy stocks have been on a decline in the last two months. Now is a good time to buy this energy stock and lock in an 8.4% yield.

Puja Tayal

Author Bio

Puja Tayal grew up in a small-business family where dinner conversations often centred on working capital and savings. Her early experiences with investing, particularly during the 2008 financial crisis, shaped her approach to understanding markets and evaluating investment opportunities. She began her career at a mutual fund company before moving into investor education and financial writing for asset and wealth management firms. Before joining The Motley Fool, Puja wrote for Market Realist, where she extensively covered the semiconductor industry. Her published work has also appeared in The Indian Express. Puja believes every stock has a story that can help investors understand its potential returns. She combines business analysis with different investing approaches to help investors make informed decisions and align their portfolios with their long-term financial goals. Outside of finance, Puja enjoys long drives, catching up with friends, watching superhero and science-fiction movies, and managing her family portfolio. She also has a keen interest in artificial intelligence and its potential to reshape the world.

Education

Bachelor's degree in Accounting and Finance, University of Mumbai (2007)
CFA Level I

Areas of Expertise

Qualitative company analysis, management strategy, risk assessment, long-term investing, portfolio diversification and rebalancing, dividend reinvestment, cyclical growth opportunities, compounding strategies, growth stocks, and dividend stocks.

Social Media Profiles

Favorite Investment Quote

"Risk comes from not knowing what you're doing." — Warren Buffett

Published June 30, 2023 11:30 am EDT

Energy stocks have fallen over the last two months, as oil prices dropped below US$80/barrel. Also, the summer months are seasonally weak for energy companies, as you can see from your electricity bills. Such a dip is a pleasant time to buy energy stocks, as they are well known for dividends. Energy companies earn money by selling electricity, fuel, and gas, which have a never-ending demand. Here is one energy stock that pays you a monthly dividend and it is currently yielding 8.4% because of the energy bears.

oil and natural gas — Image source: Getty Images

The energy stock I am bullish on

TransAlta Renewables (TSX: RNW) is a mid-cap energy stock known for its Kent Hills project. The company builds/acquires, and operates wind, solar, hydro, and natural gas facilities in Canada, the United States, and Australia. Renewable energy firms have long been deprived of growth, but they hold the potential.

The impact of climate change is worsening every year, calling for the need for immediate measures. The Justin Trudeau government is introducing a second carbon tax from July on fuel companies with high carbon footprints. While renewable energy firms are struggling, they are the future, and there is no denying it.

The energy stock with an 8.4% dividend yield

TransAlta Renewables stock slipped 24% in December when it announced a bleak outlook for 2023 as a major contract expired and high inflation increased its operating cost. Moreover, higher interest rates increased the cost of servicing its $800 million debt, which it raised to acquire Windrise.

Despite the challenges, TransAlta Renewables is holding on to its monthly dividend per share of $0.07833 by channelizing its entire cash flow available for distribution towards dividend payments. The management has been paying regular monthly dividends since August 2013 and has grown it five times in nine years. It doesn’t want to break its record by announcing a dividend cut, unless it is crucial to sustain the business.

The first-quarter earnings saw an 85% payout ratio, which is pretty high. Moreover, its revenue also fell as it produced 91 gigawatts less energy due to low wind and water resources and a longer plant outage. These are normal seasonal fluctuations and do not impact TransAlta Renewable’s long-term operations. If these conditions prolong or worsen, the company might consider slashing dividends to service its debt. But the conditions look neutral so far.

Hence the 23% dip in the company’s stock price to $11.16 inflated its dividend yield to 8.4%. The stock continues to remain oversold over fears of a dividend cut. Even if we take the worst-case scenario, where the company slashes its annual dividend by 33% to $0.62, your dividend yield would be 5.5% ($0.62/$11.16). Most Canadian energy stocks pay an average dividend yield of 5.5-6.5%.

The energy stock that pays monthly

And if you are wondering about the dividend payout, TransAlta Renewables is among the few energy companies that give monthly payouts. TransAlta Renewables is a good stock to diversify your monthly dividend portfolio beyond real estate investment trusts.

If the company overcomes these difficult times without dividend cuts, it could rally back to its $16-$19 range, representing a 40-70% upside from the current trading price. Consider an 8.4% yield as the premium for taking the risk of a dividend cut, which is difficult to predict. The second half of 2023 could see some upside momentum, as its Kent Hills project returns to service. This project dragged the company’s profits as its longer-than-expected outage increased cost.

The risk/reward trade-off

If you invest $1,000, you can buy 89 shares of TransAlta Renewables at $11.16/share and earn $6.97 in monthly passive income. In the best-case scenario, the stock recovers to its 2022 average price of $16. Then your portfolio could grow to $1,424 + $83 in annual dividends.

In the worst-case scenario, the company could slash its dividend by 33%, reducing its annual dividend to $55.2. The stock could fall 20%, reducing your portfolio value to $800 + $55.2. If you weigh the risk and rewards, TransAlta Renewables stock has a higher upside of $500 and a lower downside of $145.