Canadian pensioners are adding dividend stocks to their self-directed Tax-Free Savings Account (TFSA) to generate tax-free passive income.
Yield is important, but dividend growth also needs to be considered when evaluating the right stock to add to an income portfolio.
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Fortis
Fortis (TSX:FTS) is a good example of a top Canadian dividend stock that might not have a high yield but deserves a spot on a passive-income buy list.
Fortis increased its dividend in each of the past 52 years. Each time the board raises the distribution, the yield on an investor’s initial purchase rises. This is more important than simply picking stocks with high yields that might not have the same kind of dividend growth.
Fortis is working on a capital program of close to $29 billion that will raise the rate base by about 7% annually over the next five years. As the new assets are completed and start generating revenue, the boost to cash flow should enable Fortis to meet its annual dividend-growth guidance of 4% to 6% through 2030.
Investors who buy FTS stock at the current price can get a dividend yield of 3.5% and wait for the dividend increases to boost the return.
Enbridge
Enbridge (TSX:ENB) offers income investors both an attractive dividend yield and a strong track record of dividend growth.
The energy infrastructure and utilities giant has increased its dividend in each of the past 30 years, with recent annual hikes in the 3% range. Enbridge is a massive company with a current market capitalization of close to $147 billion, so it takes big investments to move the earnings dial in a meaningful way.
Enbridge continues to grow through acquisitions and development projects. The company purchased three natural gas utilities in the United States last year for US$14 billion. Enbridge is also working on a $35 billion capital program to drive additional revenue and cash flow growth that is expected to be in the 3% to 5% range over the next few years. This should support ongoing dividend hikes.
Investors who buy ENB stock at the current price can get a dividend yield of 5.6%.
Canadian Natural Resources
Oil and natural gas producers are not usually considered to be reliable picks for a portfolio focused on dividend growth due to the volatility of commodity markets and the reliance of the companies on oil and natural gas prices to determine profits.
CNRL, however, has managed to increase its dividend in each of the past 25 years with a compound annual dividend-growth rate above 20% over that timeframe. The size of the dividend increase can vary dramatically from one year to the next, depending on energy prices, so investors need to keep this in mind when considering the stock.
That being said, CNRL runs very efficient operations and has a diversified portfolio of assets spread out across the energy spectrum, including oil sands, conventional light and heavy oil, offshore oil, and natural gas. Management is adept at moving capital around the portfolio to take advantage of positive moves in energy prices.
CNRL also has the financial strength to drive production growth through large acquisitions to complement the drilling program. This enables the company to boost revenue and profits, even when margins get squeezed during times of lower oil prices.
Investors who buy CNRL at the current share price can get a dividend yield of close to 5%.
The bottom line
Fortis, Enbridge, and CNRL pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA focused on passive income, these stocks deserve to be on your radar.
