Is This Top Dividend Stock a Buy for Passive Income in May 2024?

Choosing the right dividend stock for a passive-income stream is challenging because it relies just as much on predicting the future as it does on deciphering the past.

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There are several ways to start a passive income in Canada. Still, the most accessible and heavily followed way is to invest in reliable dividend stocks and place these stocks in a Tax-Free Savings Account (TFSA). This way, you don’t just enjoy a passive income but also experience no additional burden on your tax bill.

Unfortunately, choosing the right stocks for passive income is not as easy. There are hundreds of choices, and even if you limit yourself to the safest pool among dividend payers — i.e., Aristocrats — several other factors must be considered, including yield, long-term dividend potential, dividend sustainability, capital growth potential, etc. One Aristocrat that ticks many of the right boxes is Emera (TSX:EMA).

A power and utility company

Emera markets itself as a leader “in the transition to clean energy,” a title many utility and power-generation businesses tend to claim nowadays. And even though the company has made significant progress in this avenue and has committed over $5.5 billion to cleaner/greener energy through 2026, it still has a long way to go.

In 2023, about 18% of its power came from renewable assets, but the company has made significant progress in shifting its power generation portfolio from coal to natural gas/oil — from 57% coal in 2005 to just 13% coal in 2023.

Emera has multiple operating companies under its banner, most of them operating in the United States. It runs both electric and natural gas utilities, and its six utility businesses collectively serve about 2.5 million customers.

Emera for passive income

Emera is among the top dividend stocks in Canada for a number of reasons, starting with its business model.

Utilities tend to be one of the most stable long-term businesses because their revenues are tied to necessary consumer spending, most of their operations are regulated via local governments, and they don’t experience heavy fluctuation in consumer numbers. All this leads to healthy and stable financials and steady revenues funding the company’s dividends.

The company also has a compelling dividend history. It has grown its payouts for 16 consecutive years and the dividend growth has been quite conservative. Between 2020 and 2024, the company has raised its payouts by 17%, which may not be an impressive number but it’s a growth rate that the company might be able to sustain for years, even decades to come. The current payout ratio is quite healthy as well.

As for the yield, the company is currently offering a juicy 5.7% yield thanks to a 21% discount it’s trading at (from its 2022 peak).

Foolish takeaway

Considering the stock’s strong dividend history and the fact that it’s climbing up at a rapid pace (8.5% in about 20 days), it is a good dividend pick for May 2024.

If you buy now, you may lock in a good yield and benefit from whatever capital appreciation the stock may offer as its bullish phase continues. Considering its rapid shift to renewables and clean energy sources, it might also be a good pick from an ESG (environmental, social, and governance) investing perspective.   

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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Emera. The Motley Fool has a disclosure policy.

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