May started on a bearish note for the TSX Composite Index, which fell 2% in April. May is the month of earnings when many companies are likely to report slightly weaker earnings. It is also the month when the anticipation for June interest rate cuts will build up. You could see a slow beginning to the month followed by a rally towards the month’s end if there are no supply shocks. Now is the perfect time to pick some magnificent dividend stocks while they trade at a cheaper rate.
Two magnificent dividend stocks to buy in May
A dividend stock becomes magnificent when you have some degree of surety that you will get a dividend at regular intervals – monthly, quarterly, or annually. Some stocks also grow their dividends faster than inflation, an opportunity to grow your money. And nothing beats it when you can buy such stocks when they are trading low just before a bull run. Here are two dividend stocks you could consider adding to your Tax-Free Savings Account (TFSA) in May.
Power Corporation of Canada
Don’t go by the name. Power Corporation of Canada (TSX:POW) has nothing to do with the power sector. It is a financial services holding company. It holds a 68.1% stake in Great-West Life Co. and 62.1% in IGM Financial. These are the two dividend sources of POW. You may know Great-West Life through Canada Life and Irish Life, of which Great West owns a 100% stake. Power Corporation also holds alternative investment and private equity companies in Europe, Canada, and America.
The POW stock price tends to move alongside the stock market and the economy. Its stock price has dipped 6.5% in the last 10 days as escalations in oil prices dimmed hopes of steep rate cuts. Nevertheless, the stock will perform well in a bull market. You could consider buying this stock now and lock in a 6% annual dividend yield. As a holding company, POW does not face any direct operating risk but enjoys dividend growth from its operating companies. It has been growing its dividend at an average annual rate of 7% since 2015, greater than Canada’s 3% inflation.
If the stock market performs well, the POW stock price will grow. The company may also accelerate its dividend growth as it did in 2020 with a 10% surge in dividends per share. POW is a good way to get exposure to the finance sector while earning regular dividends.
Capital Power stock
To add a little diversity to your TFSA portfolio, there is another good dividend stock, Capital Power (TSX:CPX). This company is in the power business, developing, acquiring, owning, and operating power generation facilities. It earns money by entering long-term power supply contracts or collecting an asset management fee for operating and maintaining a power facility for another company.
The stock fell 9.25% in the last 10 days as a decline in energy prices in Alberta and frequent outages impacted the first quarter earnings of Capital Power, which earns revenue by selling power. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 30% and adjusted funds from operations (AFFO) 32%. Despite the dip, CPX’s dividend payout was at a comfortable 53% of AFFO, hinting that it has sufficient flexibility to pay future dividends.
Capital Power is diversifying its portfolio by acquiring two natural gas-fired power stations in America – the La Paloma Acquisition and the Harquahala. These acquisitions will add an average of 8% to its AFFO. Moreover, it has signed a 15-year supply agreement for its Halkirk 2 wind power project under development. It has discontinued a $2.4 billion Genesee carbon capture and storage project as it is not economically feasible, freeing up resources to take up more profitable ventures.
All these developments could help Capital Power boost AFFO, giving it the flexibility to continue growing dividends by 6 to 7% in the coming years. Now is an opportune time to buy the stock closer to its 52-week low and lock in a 6.9% dividend yield.
