Fortis (TSX:FTS) and TC Energy (TSX:TRP) are two of Canada’s top dividend-growth stocks. The share prices are down considerably from the 12-month highs, and investors are wondering if FTS stock or TRP stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) targeting passive income or a Registered Retirement Savings Plan (RRSP) focused on total returns.
Fortis
Fortis operates $65 billion in utility assets across Canada, the United States, and the Caribbean. The company gets nearly all of its revenue from rate-regulated businesses in the segments of power generation, electricity transmission, and natural gas distribution. Electricity and natural gas are essential for homes and commercial operations, regardless of the state of the economy. As a result, Fortis has a revenue and cash flow stream that tends to be predictable and reliable.
Fortis is working on a $22.3 billion capital program that will increase the rate base by roughly a third through 2027. The resulting boost in cash flow is expected to support planned annual dividend increases of 4-6%. This is good guidance in an uncertain economic environment.
Fortis raised the payout in each of the past 49 years, so investors should be comfortable with the outlook for dividend growth.
Fortis trades near $53 per share at the time of writing. The stock was above $61 in May.
The pullback appears overdone right now, and investors can get a 4.25% dividend yield. Buying FTS stock on big dips has traditionally proven to be a savvy move for patient investors.
TC Energy
TC Energy trades for $48 right now compared to the 12-month high of around $65. Energy infrastructure stocks are under pressure due to the steep rise in interest rates that occurred over the past year. TC Energy uses debt as part of its funding program to finance its capital program. Higher interest rates drive up borrowing costs and can reduce profits.
Rates could still move higher in Canada and the United States, as the central banks try to get inflation back down to 2%. That being said, they should be getting close to the peak.
TC Energy has also been hit by soaring costs on a major project. The Coastal GasLink pipeline will cost at least $14.5 billion compared to the original budget of around $6 billion. Fortunately, the project is more than 90% complete.
The company recently raised $5.2 billion through the sale of an interest in some U.S. assets and plans to spin off the oil pipeline operations. These initiatives should shore up the balance sheet.
TC Energy says it still expects its overall $34 billion capital program to support planned dividend increases of 3-5% per year. The board has raised the payout annually for more than 20 years.
Investors who buy the stock at the current level can get a 7.7% dividend yield.
Is one a better pick?
Fortis and TC Energy pay attractive dividends that should continue to grow. At the current price, I would probably make TC Energy the first choice for a portfolio targeting passive income. Investors searching for long-term total returns might want to make Fortis the first pick in the current market environment.
