Down 6%: This Dividend Stock Is Worth a Closer Look

Dividend investors are searching for good TSX stocks to add to a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.

In the current market conditions where many top stocks have enjoyed nice rallies over the past couple of years, it makes sense to look for pullbacks in names that have strong track records of recovering from dips to reach new highs.

Fortis

Fortis (TSX:FTS) trades near $75 per share at the time of writing compared to more than $80 in March. The pullback gives investors who missed the big rally over the past two years a chance to buy at a small dip in the stock.

Fortis is a Canadian utility company with assets located in Canada, the United States, and the Caribbean. Businesses include natural gas utilities, power generation facilities, and electricity transmission networks. These are primarily rate-regulated assets, which means revenue tends to be predictable. That stability helps management plan capital investments to grow the overall business.

Fortis is currently working on a $28.8 billion capital program that should drive 7% annual growth in the rate base over five years. As the new assets are completed and start to generate revenue, the positive impact on cash flow is expected to support planned dividend increases of 4% to 6% per year through 2030. Fortis has increased the distribution in each of the past 52 years.

Fortis is considering other projects that could get added to the mix to extend the guidance or potentially increase the size of the dividend hikes. The company also has a good track record of making strategic acquisitions to drive growth, although Fortis hasn’t done a large deal for several years.

Opportunity

There is a big push in both Canada and the United States to expand electricity production and build out the electrical grid needed to move the added power. Canada recently set a goal of doubling power generation by 2050 and plans to create a national grid. Fortis has expertise in both power generation and operating electric transmission networks, so it would be a good candidate to participate in the growth of the sector in the coming years.

South of the border, gas-fired power generation facilities are being built to provide power for new AI data centres. Fortis has electric and gas utility operations in Arizona, where AI data centres are being built, and operates the largest independent electricity transmission network in the U.S., connecting eight states primarily in the Midwest.

Risks

Fortis uses debt to fund part of its large capital program. Projects can cost billions of dollars and often take years to complete. A surge in interest rates can drive up debt expenses while cutting into cash flow that can be used for debt reduction or dividend payments. Investors saw the impact of higher rates in 2022 and 2023. Fortis shares dropped from $65 to $50 during a six-month stretch in 2022 as a result.

The spike in oil prices in 2026 risks driving up inflation to the point where the Bank of Canada and the U.S. Federal Reserve could be forced to increase interest rates. If that happens and rate hikes occur over an extended timeframe, utility stocks could face new headwinds.

The pullback in FTS over the past two months is likely connected to the jump in bond yields as markets have shifted more towards expectations of rate increases later this year or in 2027.

The bottom line

Near-term volatility should be expected and further weakness in the stock price is certainly possible. That being said, Fortis remains a top candidate for dividend investors due to the reliable distribution growth. Additional downside in the shares would be an opportunity to add to the position for a buy-and-hold portfolio.

The post Down 6%: This Dividend Stock Is Worth a Closer Look appeared first on The Motley Fool Canada.

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More reading

• 5 Stocks to Hold for the Next Decade
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• 3 TSX Stocks to Buy for Magnificent Long-Term Growth
• 3 Strong Canadian Income Stocks That Raised Their Dividends Again
• 2 Dividend Stocks to Hold Comfortably for the Next 5 Years

The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.