Investing in dividend stocks is one of the best ways to generate passive income, and mid-cap stocks often offer the perfect balance between stability and growth. Capital Power (TSX:CPX), a Canadian energy company, has been steadily growing its dividend while expanding its operations. With a forward yield of 4.83% and a strong commitment to increasing payouts, it presents a compelling opportunity for investors looking to put their money to work. In fact, here’s what a $5,000 investment in CPX today could generate.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
| CPX | $53.58 | 93 | $2.61 | $242.73 | quarterly | $5,000 |
But does that make it a buy? Let’s dive in further.
The numbers
Capital Power stock recently reported its third-quarter 2024 earnings, showing adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $401 million, keeping it on track to hit its annual target between $1.31 billion and $1.41 billion. While quarterly revenue declined by 8% year over year and net income was down by 34.7%, these setbacks appear manageable given Capital Power’s strong long-term outlook.
One of the dividend stock’s most attractive features is its dividend growth. In July 2024, Capital Power increased its annual dividend by 6%, raising it from $2.46 to $2.61 per share. This marked another year of steady dividend growth, showing the company’s commitment to returning capital to shareholders. With a payout ratio of 60.75%, the dividend remains well covered by earnings, leaving room for further increases in the future.
Beyond its dividend, Capital Power is positioning itself for long-term growth through its strategic investments. The Genesee Repowering Project is a major initiative that aims to convert the Genesee Generating Station from coal to natural gas, significantly reducing emissions and increasing efficiency. The project, with an estimated cost of $1.55 billion to $1.65 billion, is expected to enhance the company’s profitability and environmental sustainability.
What about value?
Despite some analysts forecasting a decline in revenue and earnings over the next few years, Capital Power remains a well-managed company with strong cash flows. While revenue is expected to decline by 10.2% annually and earnings per share by 22.8%, the dividend stock’s return on equity is projected to be 10.4% in three years. This suggests that while short-term earnings may fluctuate, Capital Power remains financially sound and capable of sustaining its dividend.
Capital Power’s debt load is something investors should consider before investing. The dividend stock currently has $5.16 billion in total debt, with a debt-to-equity ratio of 136.99%. While high leverage is common in the utilities sector, rising interest rates could increase borrowing costs, potentially affecting profitability. However, given the dividend stock’s strong cash flows and stable operations, this risk appears manageable in the long run.
The company’s diversification efforts also add to its appeal. With a mix of natural gas, wind, and solar assets, Capital Power is well-positioned to navigate the energy transition. All while maintaining steady revenue streams. Its focus on long-term contracts and regulated power generation provides a level of stability that many investors seek when looking for reliable dividend stocks.
Bottom line
For those looking to generate passive income while holding a stock with strong dividend growth and infrastructure expansion plans, Capital Power is an attractive option. A $5,000 investment at current prices would result in approximately $242.73 per year in dividends. With the potential for higher payouts as the company continues to grow. Given its history of dividend increases, solid financials, and ongoing projects aimed at long-term sustainability, CPX remains a solid choice for income-focused investors.
