The 6% Dividend Stock About to Dominate the TSX

This dividend stock stands to make some great gains in the years to come, and right now is perhaps the perfect time to pick it up.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published August 8, 2024 4:00 pm EDT

We all want in on the future of the TSX and whatever is going to be the next big thing. But that’s practically impossible to identify … well, practically.

There is one area that’s all but assured to take over, and that’s renewable energy. So, let’s get into why this sector is bound for greatness, especially on the TSX. Furthermore, one 6% dividend stock is set to take advantage.

dividends grow over time — Source: Getty Images

Why renewables?

The renewable energy sector is poised to dominate the TSX due to a global shift towards sustainable energy solutions. Governments worldwide are implementing policies to reduce carbon emissions and combat climate change. This led to increased investments in renewable energy sources such as wind, solar, and hydroelectric power. Canada, with its vast natural resources and commitment to reducing its carbon footprint, is well-positioned to benefit from this trend.

Technological advancements and decreasing costs are also driving the renewable energy sector’s prominence. Innovations in energy storage, grid management, and efficiency improvements make renewable energy more competitive with traditional fossil fuels. The cost of solar panels and wind turbines has decreased dramatically over the past decade. Now, renewable energy projects are more affordable.

And now, everyone wants in. Large pension funds, mutual funds, and individual investors are allocating more capital to companies that demonstrate strong environmental sustainability performance. This trend is creating a favourable investment environment for renewable energy firms, driving up their stock prices and market capitalizations.

A stock to benefit

Capital Power (TSX: CPX) stands to benefit significantly. This was showcased in its recent second-quarter 2024 earnings. The company generated adjusted funds from operations (AFFO) of $178 million and a net income of $76 million, showing its strong cash flow and profitability. The successful completion of the first Canadian 30-year hybrid financing for $450 million also highlights its financial stability and ability to access capital for growth.

But there’s more on the way as well. The ongoing integration of newly acquired assets in the U.S. also illustrates the success of its geographic diversification strategy. The entry into 25-year power-purchase agreements for solar projects in the U.S. now solidifies its long-term growth prospects in renewable energy.

Furthermore, Capital Power is advancing its Battery Energy Storage System (BESS) projects, which are progressing on time and under budget. Construction is expected to begin in the third quarter. Altogether, this company is lined up for a stellar future.

Value on deck

Capital Power now offers a huge opportunity. With a trailing price-to-earnings (P/E) ratio of 8.59 and a forward P/E ratio of 13.79, the stock is relatively undervalued compared to its earnings potential. The enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of 6.74 further underscores its appealing valuation.

Furthermore, the 6% increase in annual common share dividends to $2.61 per year signals confidence in future earnings and a commitment to returning value to shareholders. With a forward annual dividend rate of $2.61 and a forward annual dividend yield of 6.01%, it offers a significant return to shareholders. This yield is well above the average, providing a reliable income stream in addition to potential capital gains. Plus, the payout ratio of 48.71% indicates that the company is distributing less than half of its earnings as dividends, which is a healthy balance that allows for both rewarding shareholders and reinvesting in growth opportunities.

Bottom line

If ever there was a time to invest in Capital Power stock, it’s now. The dividend stock has stellar finances, with a strong balance sheet supported by both top- and bottom-line growth. The company should continue to see improvements as the world continues to shift to renewables. So, with a 6% dividend yield, I would certainly pick it up on the TSX today.