Earlier this week, the Bureau of Labor Statistics announced that the Consumer Price Index in August rose 2.5% year-over-year, a 0.4% decline from July levels and lower than analysts’ projection of 2.6%. Lower-than-expected inflation numbers have raised investors’ hope of rate cuts, thus driving higher global equity markets. Amid improving investors’ sentiments, the S&P/TSX Composite Index hit a new high yesterday and closed the day 1.1% higher.
However, concerns over global growth and geopolitical tensions persist. So, investors should be careful while buying through their tax-free savings account (TFSA ), as the decline in stock prices and subsequent selling could lead to capital erosion and lower contribution margins. Given the uncertain outlook, investors should invest in stocks with solid fundamentals and consistent dividend growth. Against this backdrop, here are my two top picks.
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Enbridge
Enbridge (TSX:ENB) is an energy infrastructure company with a strong presence in the midstream, utility, and renewable energy space. The Calgary-based energy company operates a highly regulated business, with around 98% of its cash flows generated by long-term cost-of-service or take-or-pay contracts. Besides, its inflation-indexed adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) shields its financials from rising prices and wage inflation.
Supported by these solid financials, Enbridge has been paying dividends for 69 years and has hiked its dividends uninterruptedly for 29 years at an annualized rate of over 10%. It currently pays a quarterly dividend of $0.915/share, translating into a forward yield of 6.7%.
Meanwhile, Enbridge is working on acquiring the third natural gas utility asset in the United States from Dominion Energy, which would make it the largest natural gas utility company in North America. Further, the company is progressing with its $24 billion secured capital program and expects to make a capital investment of $6 billion this year while putting $4 billion of projects into service. These growth initiatives could boost its cash flows. Besides, the company’s financial position also looks healthy, with its net debt-to-EBITDA ratio at 4.7.
Given its regulated business, healthy growth prospects, and solid financials, Enbridge is well-positioned to continue its dividend growth. Besides, its valuation looks attractive, with the company currently trading 18.4 times analysts’ projected earnings for the next four quarters.
Fortis
Fortis (TSX:FTS) meets the electric and natural gas needs of 3 million customers across Canada, the United States, and the Caribbean. With 93% of its assets involved in low-risk transmission and distribution businesses, the company’s financials are less susceptible to market volatility, thus delivering stable and predictable cash flows. Supported by these healthy cash flows, the company has raised its dividends for 50 years. Its forward dividend yield currently stands at a juicy 3.8%.
Further, Fortis has planned to invest around $25 billion from 2024 to 2028, with around $7 billion of these investments in the clean energy space. These investments could expand its rate base at an annualized rate of 6.3% through 2028. Meanwhile, the company plans to meet around 66% of these investments through the cash generated from its operations and equity offerings. So, these investments would not substantially raise its debt levels.
Moreover, the Bank of Canada has slashed its benchmark interest rates three times this year and could continue with its monetary easing initiatives. Given its capital-intensive business, Fortis could benefit from these monetary easing initiatives.
