Better Buy for Dividends: Fortis Stock or TC Energy?

Fortis and TC Energy are under pressure. Is one stock now oversold?

| More on:
edit Businessman using calculator next to laptop

Image source: Getty Images.

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.

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 Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

More on Dividend Stocks

stock research, analyze data
Dividend Stocks

How Much to Invest to Get $500 in Dividends Every Month

TSX dividend stocks such as Enbridge, TD Bank, and Telus, can help you earn $500 in monthly dividend payments.

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Powerhouses: Canadian Stocks to Fuel Your Portfolio

These two top Canadian dividend aristocrats are some of the top stocks on the TSX to buy now and hold…

Read more »

Dial moving from 4G to 5G
Dividend Stocks

This Undervalued Dividend Stock is Worth Buying Right Now

Want an undervalued dividend stock with long-term potential and a juicy yield? Here's an option you may regret not buying…

Read more »

A worker gives a business presentation.
Dividend Stocks

1 Stock I’m Buying Hand Over Fist in July Despite the Market’s Pessimism

This top dividend stock is going through a rough patch, but don't let that count out all the growth we've…

Read more »

person on phone leaning against outside wall with scenic view at airbnb rental property
Dividend Stocks

2 TSX Stocks Poised to Have a Big Summer

Restaurant Brands International (TSX:QSR) stock and another darling that could be too cheap to ignore this summer.

Read more »

HIGH VOLTAGE ELECRICITY TOWERS
Dividend Stocks

Forget Fortis Stock: Buy This Magnificent Utilities Stock Instead

Looking for high dividends and returns? Then I'm sorry, but Fortis (TSX:FTS) stock probably isn't for you.

Read more »

Increasing yield
Dividend Stocks

2 High-Yield (But Slightly Risky) Stocks to Keep Your Eye on

Have these top TSX dividend stocks finally bottomed?

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks I’d Buy if They Fall a Bit

Any near-term decline in these two top Canadian dividend stocks will make them look even more attractive.

Read more »