Canadian investors are using their self-directed Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) contribution room to build portfolios of investments that can deliver passive income and long-term capital gains.
One popular savings strategy involves owning top TSX dividend stocks that have long track records of raising their distributions.
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Fortis
Fortis (TSX: FTS) trades near $75 per share at the time of writing, compared to $83 in July. Investors who missed the rally over the past two years can take advantage of the dip to buy Fortis at a decent discount to the 12-month high.
Fortis owns and operates nearly $80 billion in assets across Canada, the United States, and the Caribbean. The businesses include power-generation facilities, electricity transmission networks, and natural gas and electricity distribution utilities.
Nearly all of the revenue comes from rate-regulated assets. That means the company can reasonably predict cash flow, which helps management plan for growth investments and payments of dividends to shareholders. Households and companies need electricity and natural gas, regardless of the state of the economy, so Fortis tends to be a good stock to own during a recession.
Risks
A stable revenue stream doesn’t mean the business is risk-free. Fortis uses debt to fund its growth investments. These projects can cost billions of dollars and sometimes take years to complete. Rising borrowing costs can put a dent in profits and can reduce cash that is available for dividend hikes or debt repayment. Higher interest rates can also make some projects less attractive, potentially forcing the company to scale back growth initiatives.
Investors witnessed the impact of rate hikes in 2022 and 2023 when the central banks in Canada and the United States aggressively increased interest rates to get inflation under control. Fortis saw its share price drop from $64 to $50 over a six-month period in 2022 as investors worried that rates would go much higher.
The recent pullback in the stock is once again connected to inflation and rate-hike fears. Yields in bond markets have increased, partly due to concerns that the U.S. Federal Reserve and the Bank of Canada might be forced to raise interest rates again to keep inflation in check.
Opportunity
Fortis is working on a $28.8 billion capital program that will drive 7% compound annual growth in the rate base over five years. The resulting boost to revenue and cash flow, as the new assets are completed and go into service, should enable the company to deliver its planned annual dividend growth of 4% to 6% through 2030.
Fortis raised the dividend in each of the past 52 years, so the guidance should be solid.
The bottom line
Fortis could certainly see more weakness in the near term, but further downside would be an opportunity to add to the position. Buying Fortis on meaningful dips has historically proven to be a profitable move for patient investors.
If you have some cash to put to work in a portfolio focused on dividend growth, this stock deserves to be on your radar.
