Canadian retirees and other income investors are searching for reliable TSX dividend-growth stocks to add to their self-directed Tax-Free Savings Account (TFSA) portfolios focused on generating reliable and growing passive income.
In the current market conditions, it makes sense to consider stocks that have long track records of raising their distributions through the full range of the economic cycles.
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Fortis
Fortis (TSX: FTS) is a Canadian utility company with $75 billion in assets and nearly 10,000 employees spread out across Canada, the United States, and the Caribbean. The businesses include natural gas distribution utilities, power generation facilities, and electricity transmission networks in five Canadian provinces, 10 American states, and three countries in the Caribbean.
Interest rates have been the big story impacting the share price over the past three years, falling as rates soared while central banks battled inflation and then rallying on the rate declines. Fortis uses debt to fund part of its capital program. Projects cost billions of dollars and can take years to complete, so big changes in borrowing costs over short periods of time can have an impact on profits and cash flow.
The rebound in the share price over the past year is broadly due to cuts in interest rates by the Bank of Canada and the U.S. Federal Reserve. Looking ahead, analysts widely expect interest rates to continue the downward trend, but the pace might be slower than previously anticipated. Tariffs on goods entering the United States could drive inflation higher in the coming months. This would likely force the U.S. Federal Reserve to keep rates steady or potentially even raise them if price hikes are widespread and significant. In that scenario, Fortis and other utility stocks would likely see new headwinds.
On the operational side, the company continues to expand its assets. Fortis is working on a $26 billion capital program that will see the rate base rise from $39 billion in 2024 to $53 billion in 2029. As the new assets are completed and go into service, the boost to revenue and earnings should support planned annual dividend increases of 4% to 6% over the five years. Fortis has other projects under consideration that could be added to the mix to extend the dividend-growth guidance.
The board raised the dividend in each of the past 51 years, so investors should feel comfortable with the dividend-growth guidance. At the current share price, the stock provides a dividend yield of 3.75%.
Fortis also has a strong track record of making strategic acquisitions. It has been several years since the last large deal, but opportunities could come up as interest rates fall and consolidation continues in the utilities sector. Fortis could potentially become a takeover target, as well.
The bottom line on top stocks for dividends
Fortis provides a lower dividend yield than some other TSX stocks, but dividend growth quickly boosts the yield on the initial investment. The reliability of the dividend is a big reason for the steady rise in the share price over the long run. If you have some cash to put to work in a TFSA focused on passive income, this stock deserves to be on your radar.
