Dividend investing is one of the best strategies for generating higher returns on capital in the stock market. The TSX is full of high-quality dividend stocks with excellent track records for paying their investors shareholder dividends. There are a ton of Canadian Dividend Aristocrats that also boast a long history of hiking payouts to investors each year.
Investing in Dividend Aristocrats means these investments can grow your passive income to match inflation. By remaining invested for a long time and reinvesting the dividends, you can also use these stocks to fast-track your wealth growth through the power of compounding.
While there are plenty of go-to large-cap dividend stocks, a few mid-cap stocks offer the opportunity for growth through significant long-term capital gains.
The 6.44% dividend yield stock to watch
Capital Power (TSX:CPX) is a $4.95 billion market capitalization independent power-generation company headquartered in Edmonton. Operating in North America, it has around 30 power-generation facilities generating power through wind, gas, and solar power plants across Canada and the United States. It has a 7,700 megawatts (MW) of electricity generation capacity, with projects in the pipeline that will increase it by 4,700 MW.
The company spends about 40% of its adjusted funds from operations to fund its distributions to investors, allocating the rest to repay its debts, improve its existing plants, and acquire more. Despite the high interest rate environment, the company’s management has managed to keep good control over its debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
Its strategy to spread the debt over the long term, the company has kept maturities manageable. The approach has allowed Capital Power stock to increase its dividend by 6% in a market environment where other renewable energy companies were forced to slash payouts.
However, the weakness in the broader renewable energy industry caused its share prices to drag. As of this writing, Capital Power stock trades for $38.21 per share, boasting an inflated 6.44% dividend yield.
Foolish takeaway
Due to strong cash flows and manageable debt maturities, Capital Power stock is faring better than many other renewable energy stocks. The company’s management plans to grow payouts to shareholders by an average of 6% per year till 2025.
Meanwhile, its closest rival TransAlta Renewables was forced to merge with its parent company. The recent industry-wide troubles also saw Algonquin Power & Utilities sell off its renewable energy segment to raise capital. While its competitors struggle to stay in business within the segment, Capital Power stock is thriving in the renewable energy industry.
As of this writing, Capital Power stock trades at an 18.03% discount from its 52-week high. Investing in its shares right now can help you lock in higher-than-usual-yielding dividends and capture significant capital gains when share prices recover.
If you choose a dividend-reinvestment plan, you can unlock the power of compounding to accelerate your wealth growth through its growing payouts.
Considering the favourable conditions, Capital Power can be an excellent stock to consider adding to your self-directed portfolio right now.
