The Toronto Stock Exchange houses several dividend aristocrats across various sectors like energy, banks, infrastructure, and real estate. It is a place where a 6% dividend yield is no big deal. Dominating the TSX are large-cap dividend aristocrats like Enbridge and Royal Bank of Canada, which every Canadian knows about and has probably invested in.
These dividend aristocrats have a history of paying dividends for decades and growing them by 5 to 6% every year. Such investments can not only make your passive income inflation-ready but also help you grow your wealth in the long term through compounding. Amid these large dividend aristocrats are some budding dividend stocks that give strong growth and yield.
The 6.71% dividend stock to watch
Capital Power (TSX:CPX) is an independent power generation company operating 30 facilities that generate 7,700 MW of electricity from wind, solar, and gas power plants in Canada and the United States. It keeps acquiring new facilities and developing new plants to generate additional cash flow. The company has 4,700 MW of projects in the pipeline.
Capital Power spends around 40% of its adjusted funds from operations to pay dividends and the rest on debt repayments and acquiring and enhancing power plants. It has maintained its net debt-to-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio within the target range of less than 4 times. Its debt is spread over the long term, keeping the maturities manageable. At a time when many renewable energy companies slashed their dividends, Capital Power increased its dividend by 6%.
Its rival TransAlta Renewables merged with its parent, while Algonquin Power & Utilities decided to sell its Renewable Energy business. This weakness in the sector affected Capital Power’s stock price, which fell 29% from its August 2022 high. It has created an opportunity for investors to lock in a yield of 6.7%.
What to expect from this 6.71% dividend stock?
Capital Power is fundamentally well-placed with manageable debt maturities and strong funds flow. It aims to grow its dividends by 6% annually till 2025.
If you invest $5,000 in Capital Power now while it trades near its 52-week low of $35.11, you can buy 136 shares. If the company increases its dividend by 6% in September 2024, your 136 shares could give you $344 in annual passive income. Since the stock is trading near its low, the interest rate cut announcement in the second half could drive the stock price.
Moreover, if the company continues to grow its dividend at this rate for years, you could consider opting for the dividend reinvestment plan (DRIP). The plan will reinvest the dividend to buy more shares of Capital Power. A higher number of income-generating shares could compound your passive income in the long term.
Investor takeaway
Capital Power is a mid-cap stock with a market capitalization of $4.6 billion. CPX could be a good addition to the passive income portfolio you are building for retirement. Its 6.7% yield and 6% dividend growth rate could accelerate the compounding of passive income. The stock is riskier because of its size, but the higher yield compensates you for the risk.
It is a good practice to diversify your portfolio across sectors. Capital Power is a good stock to consider in the green energy sector.
