Should You Buy TC Energy for Passive Income?

TC Energy offers an attractive yield and a growing dividend. Is TRP stock now oversold?

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TC Energy (TSX:TRP) has pulled back considerably from the 2022 highs. Investors seeking passive income are wondering if this top TSX dividend stock is now undervalued and good to buy for a self-directed portfolio.

Impact of interest rates

A jump in interest rates over the past 18 months is largely responsible for the decline in the share prices of great dividend stocks like TC Energy. The energy infrastructure giant grows by building new assets, along with making acquisitions. Pipeline projects often cost billions of dollars and take years to complete before they go into operation to generate revenue. TC Energy uses debt as part of the financing strategy for the growth programs. Higher borrowing costs reduce profits and can put pressure on cash flow that is available for distributions.

In addition, investors who want safe passive income can currently get rates above 5% from non-cashable Guaranteed Investment Certificates (GICs). Dividend stocks carry risks, so the market has pushed down share prices to the point where dividend yields have increased enough to make owning the shares attractive compared to the risk-free alternatives.

As soon as interest rates begin to decline, TC Energy could catch a nice tailwind.

TC Energy stock

TC Energy trades near $51 per share at the time of writing. The stock was as high as $74 at the peak in 2022.

In addition to rising interest rates, TC Energy has struggled with delays and higher costs on a major natural gas pipeline project. The 670 km Coastal GasLink development recently reached mechanical completion. This is good news for investors, but the final cost for the project is expected to be about $14.5 billion, which is more than double the original budget.

Management is making good progress on boosting the cash position to help offset the hit. TC Energy sold a stake in some American assets for $5.3 billion and is on track to spin off the oil pipelines business next year. Assets in Mexico might also be monetized to shore up the balance sheet and help fund the rest of the capital program. TC Energy plans to spend $6 billion to $7 billion per year on projects in 2025 and beyond.

Despite the challenges on the Coastal GasLink project, TC Energy’s overall business is performing well in 2023 and is on target to deliver results near the top of the financial guidance. Comparable earnings before interest, taxes, depreciation, and amortization (EBITDA) are now expected to be 8% higher than last year.

TRP dividend

Management expects the capital program to support annual dividend growth of at least 3% over the medium term. At the time of writing, the stock provides a 7.3% dividend yield. TC Energy has increased the dividend annually for more than two decades.

Is TC Energy a buy today?

Market volatility should be expected until there is a clear signal from the Bank of Canada and the U.S. Federal Reserve that rate hikes are finished. That being said, TC Energy looks cheap at the current price and investors get paid an attractive yield to ride out additional turbulence.

If you have some cash to put to work in a portfolio focused on passive income, TRP stock deserves to be on your radar.

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

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