Investors of all ages can benefit from owning top TSX dividend growth stocks inside a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on income and long-term capital gains.
In the current environment where trade uncertainty is holding back investment and high oil prices are threatening to drive up inflation, it makes sense to consider companies that can generate steady profits to raise dividends through the full economic cycle.
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Fortis
Fortis (TSX: FTS) increased its dividend in each of the past 52 years. This is an impressive track record when you consider the number of major economic and market upheavals that have occurred over this timeframe.
The steadiness lies in the nature of the revenue stream. Fortis owns and operates $79 billion in utility assets across Canada, the United States, and the Caribbean. The businesses include power generation facilities, electricity transmission grids, and electric and natural gas distribution utilities.
Growth drivers
Nearly all of the revenue comes from rate-regulated businesses providing essential services. Households and companies need to keep the lights and heat on regardless of the state of the economy. The reliability and predictability of the revenue is a big reason Fortis has been able to deliver consistent dividend increases.
Fortis grows through a combination of strategic acquisitions and development projects. The company has primarily focused on organic growth for the past several years, and that is expected to continue. Fortis is working on a $28.8 billion capital program that it says will raise the rate base by about 7% annually over five years. As the new assets are completed and start to contribute to revenue and earnings, the boost to cash flow should enable Fortis to meet its goal of raising the dividend by 4% to 6% per year through at least 2030. This is solid guidance at a time when the economy could face some headwinds over the medium term.
Fortis has other tuck-in projects under consideration that could get added to the development portfolio. There could also be opportunities for larger projects, particularly in Canada where the government is focused on making the country an energy superpower and wants to construct a national power grid. Fortis has expertise in the construction and operation of major power infrastructure, so it would be a good candidate to participate in new projects.
South of the border, Fortis also has opportunities for growth as demand for electricity and natural gas is set to rise. Gas-fired power generation sites are being built to supply power to new AI data centres.
Risks
Fortis uses debt to fund some of its growth program, as projects often cost billions of dollars and can take years to complete before they begin to generate revenue. Rising borrowing costs can drive up debt expenses. This cuts into profits and can reduce the amount of cash that is available for dividend increases and debt reduction.
The stock’s pullback over the past two months is largely due to rising treasury yields caused by expectations of the interest rate hike that just occurred in the United States. If oil prices remain high for too long, there is a risk that broad-based inflation could accelerate, which would force the central banks to raise rates more aggressively.
The bottom line
Further downside is certainly possible for the stock in the coming weeks or months. If that happens, the dip would be an opportunity to add to the position. Buying Fortis on meaningful pullbacks has historically turned out to be a profitable move for patient investors.
If you have some cash to put to work in a dividend portfolio, this stock deserves to be on your radar.
