Retirees and other dividend investors have an opportunity to buy top TSX dividend-growth stocks at discounted prices for a self-directed Tax-Free Savings Account (TFSA) focused on passive income.
Buying stocks on pullbacks requires a contrarian investing style, but the strategy can boost the returns and potentially deliver attractive gains on a rebound.
Fortis
Fortis (TSX:FTS) trades near $54 per share at the time of writing. The stock is above the 12-month low of around $50 but is way off the $64 it reached in 2022.
Fortis operates roughly $68 billion in utility assets across Canada, the United States, and the Caribbean. The businesses include power-generation facilities, electric transmission networks, and natural gas distribution utilities. These are rate-regulated assets that generate reliable and predictable revenue and cash flow.
Fortis grows through a combination of acquisitions and internal projects. The current $25 billion capital program is expected to boost the rate base from $37 billion in 2023 to $49 billion in 2028. As new assets go into service, the increase in cash flow should support planned annual dividend increases of 4-6%. Fortis has additional projects under consideration that could get the green light and would potentially extend the rate base expansion beyond 2028. Management hasn’t completed a major acquisition for several years, but Fortis has a strong track record of driving growth through takeovers. Any new deals could lead to higher cash flow and large dividend increases.
Fortis raised the dividend in each of the past 50 years. The current dividend yield is 4.3%.
Upside potential
High interest rates are largely to blame for the decline in the share price over the past two years. The Bank of Canada and the U.S. Federal Reserve aggressively raised interest rates to cool off the economy as a means to get inflation under control. Inflation was 9% in the U.S. and 8% in Canada in June 2022. The April 2024 inflation rates were 3.4% and 2.7% in the U.S. and Canada, respectively. This is still above the 2% target, but inflation is heading in the right direction.
The Bank of Canada is widely expected to start cutting interest rates this month or in July. A recent pullback in oil prices should reduce gasoline prices in the coming weeks and will likely lead to lower inflation reports for June and July. South of the border, rate cuts might not start until later this year or in early 2025.
Regardless of the timing, the next rate moves by the central banks should be to the downside. This will reduce borrowing costs for Fortis and should free up more cash for distributions or investment in projects.
Should you buy now?
Ongoing volatility is expected in the coming months, but Fortis already looks cheap and pays an attractive dividend that should continue to grow. If you have some cash to put to work in a TFSA focused on passive income, this stock deserves to be on your radar.
