Investing in blue-chip dividend stocks can help you create a passive-income stream at a low cost. You need to identify quality companies with strong fundamentals, a sustainable payout ratio, and a tasty dividend yield to begin your passive-income journey with stocks.
Two top TSX dividend stocks include large-cap giants such as Enbridge (TSX:ENB) and Brookfield Renewable Partners (TSX:BEP.UN). Both of the companies generate cash flows across market cycles, have sound financials, a high dividend yield, and a growing earnings base, which should support dividend hikes going forward.
Let’s see why.
Is Brookfield Renewable Partners a good stock to buy right now?
Interest rate hikes in the last two years have driven valuations of capital-intensive companies such as Brookfield Renewable Partners significantly lower. Down 42% from all-time highs, BEP stock trades at a steep discount to historical multiples but offers you a dividend yield of 5.2%.
A clean energy giant, Brookfield Renewable Partners has raised dividends every year since 2014. Moreover, these payouts have increased by 6% annually in this period, enhancing the effective yield significantly.
The growth story for Brookfield Renewable Partners is far from over, given the worldwide shift towards clean energy solutions. For instance, Brookfield Renewable currently owns and operates 32 gigawatts of capacity and has a development pipeline of 132 gigawatts. It suggests the company is positioned to grow its power-generating capacity by 300% in the next few years.
Alternatively, fueling this growth will cost either debt or equity capital. Rising interest rates will negatively impact profit margins and weaken the balance sheet, while equity capital will result in a dilution of existing shareholder wealth. However, armed with an investment-grade balance sheet, Brookfield Renewable should easily access debt capital at reasonable costs.
Analysts remain bullish on BEP stock and expect shares to surge by 15% in the next 12 months. After adjusting for dividends, the total returns will be closer to 20%.
Is Enbridge stock a buy or a sell?
One of the most popular dividend stocks on the TSX, Enbridge offers a yield of 7.7%. The energy infrastructure giant owns a wide network of pipelines, natural gas utilities, and clean energy projects. These cash-generating assets have allowed Enbridge to increase dividends by 10% annually in the last 28 years, showcasing the resiliency of its cash flows.
A majority of Enbridge’s earnings before interest, tax, depreciation, and amortization are backed by long-term contracts, which are indexed to inflation, shielding it from fluctuations in commodity prices.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Brookfield Renewable Partners | $35.88 | 433 | $0.4575 | $200 | Quarterly |
| Enbridge | $47.55 | 327 | $0.915 | $300 | Quarterly |
Enbridge aims to maintain a payout ratio of below 70%, allowing it to invest in growth projects, lower balance sheet debt, and raise dividends further. Priced at 16 times forward earnings, ENB stock trades at a discount of 12% to consensus price target estimates.
The Foolish takeaway
Investors looking to earn $2,000 in annual dividend income will have to invest a total of $31,100 equally distributed in these two TSX stocks. If the companies raise dividends by 7% annually, your dividend payouts will double in the next 10 years to $4,000, increasing your effective yield to almost 13%.
