The Market Has Punished This Dividend Giant Enough: I’d Buy Before Sentiment Turns

Capital Power’s dividend looks safer than the stock price suggests, and a long-term Meta data-centre deal could drive future demand.

| More on:
Key Points
  • Capital Power’s cash flow (AFFO) jumped and easily covers the dividend, even though reported net income looked weak.
  • A new 250MW long-term agreement to supply Meta’s Alberta data centre ties AI growth directly to future electricity demand.
  • The dividend is still rising with a roughly 4% yield, but debt and project risks mean it’s not guaranteed.

A good dividend stock can spend months looking broken while the underlying business improves.

That’s one of the more useful quirks of investing. Share prices respond immediately to interest rates, earnings headlines, debt worries, and whatever has markets grumpy that morning. Dividends, meanwhile, depend on something much less theatrical: whether the company continues generating enough cash to pay them.

That distinction can create opportunity.

When sentiment turns against an income stock, I’m not interested simply because the yield went up. A 7% yield attached to deteriorating cash flow is just a warning sign wearing nice clothes. I want cash flow covering the payout, a reason earnings can grow, and ideally management still confident enough to increase the dividend. Capital Power (TSX: CPX) checks those boxes for me right now.

man in suit looks at a computer with an anxious expression

Source: Getty Images

What happened

Power producers are capital-intensive businesses. They need enormous amounts of money to buy and build generating plants, which means debt and financing costs matter. That can make investors especially twitchy when interest rates or bond yields move higher. CPX stock also reported a $43 million net loss in its latest quarter, which certainly doesn’t look gorgeous at first glance.

Yet accounting earnings don’t tell the whole story for a power producer. Depreciation, financing costs, acquisitions, and movements in commodity hedges can make net income rather lumpy. I’m more interested in the cash the assets actually produce and whether that supports the dividend.

That picture looks considerably better. CPX stock generated $328 million in adjusted funds from operations (AFFO) during the second quarter, up from $235 million a year earlier. AFFO per share reached $2.09. The dividend declared during the quarter was only $0.69 per share. That’s a rather comfortable amount of cash-flow coverage, even before looking at where future demand may come from.

Then Meta showed up

CPX stock owns approximately 12 gigawatts of generating capacity across 35 facilities in Canada and the United States, spanning natural gas, renewables, and battery storage. That increasingly puts it in the business of supplying something artificial intelligence (AI) desperately needs: electricity.

In July, Capital Power signed a greater-than-10-year agreement to provide 250 megawatts of capacity and energy for Meta Platforms’ new Alberta data centre. The load is expected to come online in the second half of 2028. That’s the kind of catalyst I like because it connects the AI boom directly to future demand rather than asking investors to squint at a vague press release containing the words “artificial intelligence.”

Data centres need enormous quantities of reliable electricity around the clock. Power producers capable of signing long-term contracts with hyperscale customers can turn that demand into more predictable cash flow. Suddenly, the market’s worries about yesterday’s earnings look a little less interesting.

A strong dividend

CPX stock recently raised its quarterly dividend another 2% to $0.70 per share, marking its 13th consecutive annual increase. At a recent share price around $67, the new annualized payout of roughly $2.82 produces a yield near 4.2%. Right now, here’s what just $7,000 could bring in.

COMPANYRECENT PRICENUMBER OF SHARESANNUAL DIVIDENDANNUAL TOTAL PAYOUTFREQUENCYTOTAL INVESTMENT
CPX$67.00104$2.82$293.28Quarterly$6,968.00

That combination is why I prefer dividend growth to simply hunting for the highest starting yield. Investors can collect meaningful income today while future increases potentially push the income produced by their original investment higher. Reinvesting those payments into additional Canadian dividend stocks can accelerate the effect further.

What’s more, CPX stock recently traded about 13% below its 52-week high of $77.02. That isn’t crash territory, but I don’t need a disaster to become interested in a good company.

Foolish takeaway

There are risks. CPX stock has expanded aggressively, including major U.S. acquisitions, which brings integration and financing risk. Electricity prices can fluctuate, projects can cost more than expected, and a heavily capital-intensive business can feel higher borrowing costs quickly.

That’s why I wouldn’t treat its dividend as guaranteed. Still, the company is producing strong AFFO, raising its payout, and signing long-term agreements tied directly to rising data centre electricity demand. Investors waiting until every worry disappears may discover the share price has already gone up.

For anyone buying stocks in Canada, I’d rather collect a roughly 4.2% yield while sentiment is still cautious than chase CPX stock after the market decides electricity demand was obvious all along.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Capital Power and Meta Platforms. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Canadian investor contemplating U.S. stocks with multiple doors to choose from.
Dividend Stocks

Enbridge vs. Telus: Which Is the Better Dividend Stock to Own Through 2026?

Enbridge and Telus both offer attractive yields, but their financials and underlying fundamentals reveal a big difference in dividend stability…

Read more »

woman gazes forward out window to future
Dividend Stocks

2 Dividend Stocks to Comfortably Hold for the Next 5 Years

While no dividend is guaranteed, these companies have shown their ability to generate resilient cash flows and return capital.

Read more »

crisis concept, falling stairs
Dividend Stocks

TFSA Income: 2 Discounted Dividend Stocks to Consider Now

Are these high-yield TSX stocks oversold?

Read more »

man looks surprised at investment growth
Dividend Stocks

1 RRIF Withdrawal Could Shrink Your OAS More Than You Expect

A big RRIF withdrawal can trigger an OAS clawback, so building TFSA flexibility and dividend growth beforehand can help.

Read more »

a person watches stock market trades
Dividend Stocks

A High Yield Won’t Save You From a Dividend Cut: This 2.5% Payout Looks Safer

A huge dividend yield can be a trap if it’s high because the stock price is falling and a cut…

Read more »

dividend stocks are a good way to earn passive income
Dividend Stocks

$50,000 in a TFSA Could Pay You $227.16 a Month Without Selling a Share

A $50,000 TFSA can generate a +$200 monthly “paycheque” if you own a reliable monthly payer like CT REIT.

Read more »

Illustration of data, cloud computing and microchips
Dividend Stocks

The Best Discounted TSX Stocks to Snap Up Now

These two discounted TSX stocks are trading well below their 52-week highs even as they continue to show encouraging business…

Read more »

ETFs can contain investments such as stocks
Dividend Stocks

Don’t Fall for Telus’s Dividend: Buy This Monthly High-Yield ETF Instead

Telus (TSX:T) stock has a high yield, but a bad history of dividend cuts.

Read more »