Canada has several stocks that pay shareholders a dividend. But investors should realize that in addition to the dividend yield, you need to look at several other factors, such as a company’s payout ratio and earnings growth potential, which will drive future payouts higher and increase your effective yield over time.
Basically, dividend-paying companies should generate enough cash flows to pay investors a dividend, strengthen their balance sheet, reinvest in capital projects, and target accretive acquisitions.
Here are three such TSX dividend stocks you can buy for decades of passive income.
Brookfield Infrastructure Partners stock
U.S. president Joe Biden recently called the next 10 years the country’s infrastructure decade, making companies such as Brookfield Infrastructure Partners (TSX:BIP.UN) enticing investment options right now.
Brookfield Infrastructure owns and operates data centres, cell towers, pipelines, toll roads, semiconductor foundries, electricity distribution lines, and more.
It recently announced a controlling stake in Compass Datacenters, a North American-based data centre operator. BIP also closed the acquisition of another European data centre business in the June quarter.
A diversified portfolio of cash-generating assets has allowed BIP to increase dividends for 14 consecutive years and offers a forward yield of 5.4%. BIP expects to increase organic funds from operations, or FFO, between 6% and 9% each year, which should support future dividend hikes.
Down 31% from all-time highs, BIP stock currently trades at a discount of 50% to consensus price target estimates.
Fortis stock
A Canada-based utility giant, Fortis (TSX:FTS), currently pays shareholders an annual dividend of $2.36, indicating a yield of 4.4%. Fortis is a heavyweight in the regulated gas and electric utility industry, serving customers in 18 jurisdictions in Canada, the U.S., and the Caribbean.
Armed with an investment-grade balance sheet, the cash flows for Fortis are regulated and predictable across market cycles. These regulated cash flows have allowed the company to increase dividends for 50 consecutive years, which is the second-largest streak among TSX stocks.
It expects to pursue energy infrastructure investments, allowing Fortis to grow dividends by 6% each year through 2028.
Priced at 18 times forward earnings, Fortis stock trades at a discount of 8% to consensus price target estimates.
Hydro One stock
The final TSX dividend stock on my list is Hydro One (TSX:H), which offers you a yield of 3.4%. It operates as an electricity transmission and distribution company and is valued at $21.3 billion by market cap.
Hydro One owns and operates high-voltage transmission lines and low-voltage distribution networks. It serves residential, commercial, and industrial customers, including municipal utilities.
In the second quarter (Q2) of 2023, Hydro One reported earnings of $0.44 per share, an increase of 2.3% year over year. The company’s earnings increased following the approval of higher transmission rates, which were offset by rising operating expenses.
Hydro One also disclosed it filed an application with the Ontario Energy Board to construct both phases of the Waasigan Transmission Line Project, which will cost $1.2 billion and drive cash flows higher once the project is completed.
Priced at 20 times forward earnings, Hydro One stock trades at a discount of 10% to consensus price target estimates.
