A Dividend Giant I’d Buy Over TransAlta Renewables Stock

TransAlta Renewables’ 7% dividend yield is fading as it merges with its parent. But this dividend giant can give a 7%+ yield.

| More on:
grow money, wealth build

Image source: Getty Images

High interest rates are pinching the cash flows of utilities and energy companies with high debt. It started with Algonquin Power & Utilities, which slashed dividends by 40%, terminated the acquisition of Kentucky Power, and is now under pressure to sell the renewable power business. All these efforts are to reduce debt. Algonquin is a smaller company. Dividend giant TC Energy has announced plans to spin off its oil pipeline business and sell around $5.2 billion in assets to reduce debt. And TransAlta Renewables (TSX:RNW) is no exception. 

Why I turned bearish on TransAlta Renewables

TransAlta Renewables is a midcap energy stock that builds, acquires, and operates wind, solar, hydro, and natural gas facilities in Canada, America, and Australia. It is a part of TransAlta Group. The renewables company was operating smoothly in a growing economy, paying monthly dividends since 2013. It kept adding to its debt and servicing it comfortably while paying an average dividend yield of 7%. 

Things got tougher when interest rates jumped from 0.25% in February 2022 to 5% in July 2023. The rising interest rate increased the cost of servicing the debt. Higher interest expenses, combined with the expiry of a major contract, and increasing operating expenses due to inflation strained RNW’s cash flows. 

Its wind and water resources generated lower-than-expected power, reducing its distributable cash flow by 13% to $0.45 in the first half. This made it difficult for the company to pay a $0.94 dividend per share for 2023. Almost a month before the second-quarter earnings, TransAlta Renewables agreed to get acquired by its parent TransAlta, which is more resourceful and has a stronger balance sheet

TransAlta is buying RNW shares for $13 cash or 1.0337 common shares of TransAlta. If you invested in RNW for its higher yields, you are better off selling the shares at $13, as TransAlta only offers a $0.22 dividend per share (1.69% dividend yield). 

Buy this dividend giant instead of TransAlta Renewables

A higher interest rate could see many small- and mid-cap companies make tough decisions. At such times, it is better to invest in a dividend giant like Enbridge (TSX:ENB). Unlike TransAlta Renewables, Enbridge has lived through recessions and even the 1990s stagflation when the US Fed hiked interest rates above 10%.

And despite such tough market conditions, Enbridge neither spun off nor consolidated nor slashed dividends. It did pause dividend growth, but its growing pipeline infrastructure even overcame that weakness and helped it grow dividends for 27 consecutive years (even during the 2008 Financial crisis, 2015 oil crisis, and 2020 pandemic). 

Many energy companies’ payout ratios increased as they maintained their dividend while their distributable cash flow (DCF) fell. But Enbridge’s payout ratio remains at 60%, within its target ratio of 60-70%. The remaining 40% DCF gives Enbridge a capital buffer to pay dividends during weak phases. 

Enbridge stock is trading at its 52-week low of below $48. If a recession materializes, the stock could fall below $40, and the company might further slow its dividend growth. But its fundamentals show that it can continue paying a dividend per share of $3.55 

What to expect from this dividend giant

Enbridge stock has recovered from several crises and rewarded its shareholders who bought the dip with a strong recovery rally. After falling 34% from its peak during the pandemic, the stock jumped 57% between March 2020 and June 2022. Even in the 2015 oil crisis, Enbridge stock crashed 30% only to recover 30%.

YearDividend per ShareGrowth
2023$3.553.2%
2022$3.443.1%
2021$3.33723.0%
2020$3.249.8%
2019$2.95210.0%
2018$2.68411.2%
2017$2.41313.8%
2016$2.1214.0%
2015$1.8632.9%
2014$1.4011.1%
Enbridge’s dividend growth (2014–2023)

Enbridge slowed its dividend growth after the crisis. When faced with macroeconomic weakness, your priority is to keep your investments safe. I would sell TransAlta Renewables holdings and buy Enbridge stock instead. Enbridge can help recoup any losses from RNW when the market turns bullish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy. Fool contributor Puja Tayal has no position in any of the stocks mentioned. 

More on Energy Stocks

gift is bigger than the other
Energy Stocks

Better Oil Stock: Imperial Oil vs Cenovus Energy?

Two energy stalwarts stand on solid ground in the face of US tariffs, but one is the better oil stock…

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

Enbridge: Buy, Sell, or Hold in 2025?

Enbridge (TSX:ENB) has a high dividend yield, but is it sustainable?

Read more »

Investor reading the newspaper
Energy Stocks

Top Canadian Stocks to Buy Right Now With $2,500

Investing in undervalued Canadian stocks such as Propel should help you derive outsized gains in 2025 and beyond.

Read more »

The sun sets behind a power source
Energy Stocks

Northland Power: Buy, Sell, or Hold in 2025?

With three major projects coming on stream in the next couple of years, 2025 should be a good year for…

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

What to Know About Canadian Energy Stocks for 2025

Today, I'll explore tariffs, pipelines, and profit potential on TSX energy stocks for 2025, and how Suncor stock and two…

Read more »

Utility, wind power
Top TSX Stocks

3 Reasons to Buy Enbridge Stock Like There’s No Tomorrow

There are plenty of reasons to buy Enbridge (TSX:ENB) for both growth and income investors to consider. Here's a look…

Read more »

how to save money
Energy Stocks

Best Stock to Buy Right Now: Canadian Natural Resources vs Imperial Oil?

Two Canadian oil majors should hold up well against US tariffs on energy imports, but one is a screaming buy.

Read more »

Concept of multiple streams of income
Energy Stocks

This is the Best Energy Stock to Invest $200 in Right Now

This energy stock offers a massive dividend yield, a growing business, and stable income. So why wait?

Read more »