Canadian investors are wondering where they can invest their new $7,000 in Tax-Free Savings Account (TFSA) contribution room to get good dividend yields and a shot at decent long-term total returns.
Pullbacks in top dividend-growth stocks provide an opportunity to pick up a better yield and position the portfolio for gains on a rebound.
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Enbridge
Enbridge (TSX:ENB) is a major player in the North American energy infrastructure industry with a current market capitalization of close to $135 billion. The stock is down about 10% from the 12-month high, giving income investors who missed the rally last summer a chance to get in on a pullback.
Enbridge is best known for its oil pipeline network that moves about a third of the oil produced in Canada and the United States. Recent weakness in the stock could be attributed to concerns that Venezuelan oil will start to replace Canadian oil that is currently sent to refineries on the Gulf Coast in the United States.
The U.S. Venezuelan offensive
The U.S. plans to invest in Venezuela’s oil sector to boost output. Estimates put the required capital outlay as high as US$100 billion. Oil companies will need guarantees that their assets won’t be privatized after the investments are made. Oil prices would also have to be high enough to generate the desired returns. Some impact from higher Venezuelan supplies is expected, but any meaningful replacement of volumes coming from Canada to U.S. refineries will likely take a long time.
As such, a feared decline in volumes of oil flowing along Enbridge’s pipelines from Canada to the United States is likely overdone. Enbridge recently announced a US$1.8 billion project to expand its Mainline capacity to move more oil to American refineries in the U.S. Midwest and Gulf Coast. Investors will want to watch the coming quarterly reports to see if the expansion plan remains on track.
Enbridge has $35 billion in total secured capital projects on the go that will help drive cash flow growth in the coming years. This should support steady dividend hikes. The board raised the dividend in each of the past 30 years. Investors who buy ENB stock at the current level can get a dividend yield of 6.2%.
Fortis
Fortis (TSX:FTS) trades near $72 at the time of writing compared to the 12-month high around $74 per share. The stock is widely viewed as a solid defensive pick for income investors who might be concerned that economic headwinds are on the way in Canada and the United States.
Fortis owns utility businesses, including power generation facilities, natural gas distribution utilities, and electric transmission grids. Revenue is primarily rate-regulated. This means cash flow tends to be predictable and reliable.
Fortis is working through a $28.8 billion capital program that will boost the rate base by a compound annual rate of roughly 7% over five years. This should support planned annual dividend growth of 4% to 6% through 2029. Fortis raised the dividend in each of the past 52 years.
The bottom line
Enbridge and Fortis pay attractive dividends that should continue to increase. If you have some cash to put to work in a portfolio focused on dividend income, these stocks deserve to be on your radar.
