A Canadian Dividend Stock to Hold Forever in Your TFSA

TSX dividend stocks such as Canadian Utilities enable investors to earn a steady stream of growing passive income for life.

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Dividend stocks allow shareholders to create a steady stream of passive income at a low cost. Ideally, investors would want to buy and hold quality stocks that increase their dividend payouts each year, increasing the effective yield in the process.

Moreover, if these stocks are held in a TFSA (Tax-Free Savings Account), investors can benefit from regular dividend income and long-term capital gains, both of which are exempt from Canada Revenue Agency taxes.

One such TSX dividend stock you can consider holding in a TFSA is Canadian Utilities (TSX:CU). Let’s see why.

Canadian Utilities is a Dividend King

With $22 billion in total assets, Canadian Utilities is valued at $7.9 billion by market cap. It is a diversified energy infrastructure company that offers solutions in utilities, energy infrastructure, and retail energy.

Its highly contracted and regulated earnings base provides Canadian Utilities with the foundation for dividend growth. Canadian Utilities has grown its global rate base to $14.9 billion, allowing it to report stable cash flows across business cycles.

The TSX giant continues to reinvest in growth projects, which should increase its future cash flow and earnings. Between 2023 and 2025, Canadian Utilities expects to invest $4.1 billion in regulated utility and commercially secured energy infrastructure growth projects. Moreover, around $3.3 billion will be spent on regulated utilities.

Canadian Utilities currently pays shareholders an annual dividend of $1.79 per share, indicating a dividend yield of 6.2%. Similar to other utility players, Canadian Utilities has a substantial amount of debt on its balance sheet, making investors nervous in recent months due to interest rate hikes.

For instance, CU stock has trailed the broader markets in the last two years as it ended the second quarter (Q2) with $10.6 billion in total debt. This has dragged the TSX dividend stock lower by 34% from all-time highs, increasing the dividend yield to more than 6%.

However, investors should note that the dividend yield for Canadian Utilities is sustainable, and it has increased the payouts for 51 consecutive years, the longest record of annual increases for any TSX company.

Canadian Utilities aims to grow dividends in line with its earnings growth, which is linked to the expansion of regulated and contracted investments.

What is the target price for Canadian Utilities stock?

In January 2023, Canadian Utilities acquired two operating wind assets and a development pipeline of wind and solar projects. The acquisition includes a majority interest in a 30-megawatt (MW) wind facility in Ontario and a 202 MW wind project in Alberta. Canadian Utilities has a development pipeline of 1,500 MW of wind and solar projects in various stages of development, which will be a key driver of future cash flows.

Canadian Utilities stock has returned 338% to shareholders in the last two decades after adjusting for dividends, which is similar to returns generated by the TSX index. Currently, CU stock is priced at 13.2 times forward earnings, which is not too expensive.

Out of the seven Bay Street analysts covering Canadian Utilities stock, one recommends “buy,” and six recommend “hold.” The average target price for CU stock is $36, which is 24% above the current trading price.

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.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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