With markets near record highs and economic weakness potentially on the horizon due to rising inflation and trade uncertainties, investors are wondering which top TSX stocks might be good to consider right now for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and long-term total returns.
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Fortis
Fortis (TSX: FTS) is a great example of a solid dividend-growth stock that investors can buy and simply sit on for decades.
The utility company owns power generation, electricity transmission, and natural gas distribution businesses located across Canada and throughout the United States, as well as in the Cayman Islands. Nearly 100% of the revenue comes from rate-regulated operations. This means cash flow should be reliable and predictable, which is helpful for management when planning out growth investments.
Fortis is currently working on a $28.8 billion capital program that will increase the rate base from about $42 billion to nearly $59 billion over five years. As these new assets are completed and start to generate revenue, the boost to earnings should support management’s goal of raising the dividend by 4% to 6% per year through 2030. Fortis has given investors a dividend boost in each of the past 52 years, so the guidance should be solid.
Fortis also has a history of growth through strategic acquisitions. The company hasn’t done a large deal for several years, but consolidation in the utility sector could start to ramp up again as power demand in Canada and the United States expands due to the construction of hundreds of new AI data centres that consume large amounts of electricity. New gas-fired power generation facilities and electrical grid upgrades will be required in both countries.
As part of Canada’s plan to become an energy superpower, the country wants to build a nationwide electricity grid. Fortis has the expertise to build and operate electrical infrastructure, making it a good candidate to participate in new projects in the country.
South of the border, Fortis has extensive utility operations that generate revenue and profits in American dollars. This gives investors good exposure to the U.S. utility sector through a top Canadian company. When the U.S. dollar rises in value against the Canadian dollar, the U.S. earnings conversion can result in a nice boost to profits.
Risks
Fortis uses debt to fund part of its growth program. This makes it susceptible to big moves in interest rates. In 2022 and 2023, for example, when the U.S. Federal Reserve and the Bank of Canada aggressively increased interest rates to get inflation under control, the steep jump in borrowing costs over such a short period of time led to a pullback in utility stocks. Fortis dropped from $64 per share to $50 per share in 2022.
Rate hikes could be on the way again later this year or in 2027 if inflation continues to climb.
The bottom line
Fortis pays a good dividend that should continue to grow. Potential turbulence could be on the way for the utility sector in the near term, but this stock should still be a solid buy-and-hold pick. Adding Fortis on dips has historically proven to be a savvy move for patient investors.
