The Tax-Free Savings Account, or TFSA, has been providing investors with tax-free gains and income since 2009. In this time frame, the cumulative contribution limit has increased to $102,000. This means that there a lot of tax-savings to be had. So, wherever you are on your TFSA journey, I would recommend maxing out on this contribution room as quickly as you can. You can do this with the help of a monthly dividend powerhouse like Northland Power (TSX:NPI).
Let’s explore the investing merits of this 5.2%-yielding stock.
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TFSA tax savings
It’s been a couple of years since Guaranteed Investment Certificates (GICs) have yielded 5%. And even when they did, this was short-lived. Today, GICs are typically in the mid-3% range. Northland Power’s yield is well above this range, giving shareholders a very attractive dividend income stream.
Let’s assume that you invest $30,000 into Northland Power stock. This would give you monthly dividend income of $130, or annual dividend income of $1,560. But the benefits don’t end there. Because you are buying Northland within your TFSA, this amount, along with any capital gains, is tax-free.
Is Northland Power due for a dividend increase?
Northland’s monthly dividend payment has been held steady at $0.10 per share since December 2017. This has been a function of the capital-intensive utility business that Northland is in. The company’s debt balance has had to be carefully managed before dividends can be paid and/or increased. It’s also a function of the amount of new major projects that Northland has been investing in during these years.
For example, Northland’s Hai Long offshore wind project in Taiwan has been under construction since 2017. Also, the company’s Baltic Power wind farm project in Poland has been under construction since 2023.
The good news is that these projects are nearing completion, with Hai Long on track for full commercial operation by 2027 and Baltic Power expected to begin commercial operation in 2026. These projects came in under budget and on schedule, and are expected to generate significant cash flows beginning in the next couple of years.
Also, these projects further diversify Northland’s revenue and cash flows, thus reducing the risk of financial results and of the stock. They increase the size and scale of Northland, placing it in a position to eventually increase its dividend.
Looking ahead
Management’s guidance for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2025 is $1.3 billion to $1.4 billion. This represents an increase of between 3% and 11%. As we head into 2026 and 2027, EBITDA will get an additional boost of roughly $600 million from the new projects over and above the company’s normal organic growth rate. Cash flow will also get an additional boost from the newly completed projects.
Northland is still working on reducing its debt. This task will also be easier with the completion of the new projects. Back in 2021, Northland’s long-term debt peaked at over $7 billion. Today, the company has managed to bring this debt level down to $6.1 billion.
The bottom line
I think that the long-term picture looks bright for this monthly dividend energy stock. Tax sheltering it in your TFSA is a good strategy to maximize your income and returns.
