Dividend stocks continue to be some of the most sought out stocks on the TSX today. The thing is, not all dividend stocks are alike. When selecting dividend stocks for passive income, investors often focus on key factors such as dividend yield. However, it’s just as important to consider other aspects, such as the payout ratio, dividend history, financial health, and growth prospects.
That’s why today, we’re going to do just that when comparing Capital Power (TSX: CPX) and TC Energy (TSX: TRP) to determine which is a better investment for passive income on the TSX.
The dividend
Right now, Capital Power boasts a dividend yield of approximately 6%. This is higher than the average yield for many utility companies. The company maintains a sustainable payout ratio of around 46.4% as well. What’s more, Capital Power has a solid track record of increasing dividends consistently over the past decade. For instance, the dividend has grown from $1.26 in 2013 to $2.46 in 2024, reflecting a robust commitment to returning value to shareholders. Altogether, this indicates that its dividends are well-covered by earnings and there is room for future growth.
TC Energy, on the other hand, offers a higher dividend yield of approximately 6.6%, making it an attractive option for income-focused investors. However, TC Energy’s payout ratio is significantly higher at 143.1% as of writing. Meanwhile, TC Energy also has a commendable history of dividend increases, with dividends rising from $1.84 per share in 2013 to $3.84 per share in 2024. Despite this, the company’s higher payout ratio could limit future dividend growth compared to that of Capital Power.
Digging into finances
The key then is whether the company’s financial situation can continue to support the dividend, as well as growth. Capital Power displays strong financial health, with a debt-to-total-capital ratio of 55.7%, slightly below the industry average. This manageable debt level, combined with stable cash flows from its diversified portfolio of power generation assets, supports the company’s ability to maintain and grow its dividends.
TC Energy, while maintaining a robust balance sheet, has a higher debt-to-total-capital ratio of 61.9%, which is above the industry average. Although the company’s long-term contracts and regulated assets provide a stable revenue stream, the high leverage poses a risk if not managed prudently.
Furthermore, Capital Power shows impressive profitability with a net profit margin of 16.8%, higher than the industry average of 11.5%. The company’s return on equity (ROE) stands at 19.8%, significantly above the industry average, indicating efficient use of equity to generate profits. Furthermore, Capital Power’s EPS growth rate of 132% is well above the industry average, showcasing strong earnings growth.
As for TC Energy, it also shows strong profitability with a net profit margin of 17.3%, also higher than the industry average. However, its ROE of 8.4% is lower than Capital Power’s, though still above the industry average. TC Energy’s EPS growth rate of 63.5%, while commendable, has been more volatile over the past five years.
Value
Alright, so with all that in mind, which company is possibly more valuable based on metrics and its financial situation? Capital Power has a trailing price-to-earnings (P/E) ratio of 7.9 and a forward P/E ratio of 13.1, both below the industry average. This suggests that it might be undervalued relative to its peers. The company’s price-to-book ratio of 1.4 is close to the industry average, indicating a fair valuation compared to its book value.
TC Energy, in contrast, has a higher trailing P/E ratio of 22.2 times, above the industry average, implying high growth expectations from investors. However, the forward P/E ratio of 13.4 suggests that future growth may not meet these high expectations. The price-to-book ratio of 2.2 indicates that the stock is slightly overvalued compared to its book value.
The answer is clear
I think you know where we’re headed with this. Capital Power appears to be a better dividend stock for passive income investors based on its lower valuation and sustainability. TC Energy, while offering a higher dividend yield, faces sustainability concerns due to its high payout ratio and leverage. Although it has a robust dividend history and strong profitability, the potential risks associated with its high leverage and lower expected growth make it a less attractive option compared to Capital Power.
