Dividend stocks remain a popular choice among investors on the Toronto Stock Exchange (TSX) due to the potential for passive income. However, not all dividend stocks are equal. When selecting dividend stocks for passive income, several factors must be considered beyond just the dividend yield. Factors such as payout ratio, dividend history, financial health, and growth prospects are crucial in making informed investment decisions.
In this analysis, we will compare two companies, referred to as Capital Power (TSX:CPX) and TC Energy (TSX:TRP), to determine which may be a better investment for passive income on the TSX.
First, Capital Power currently offers a dividend yield of approximately 6%, with a sustainable payout ratio of around 46.4%. The company has a consistent track record of increasing dividends over the past decade, indicating solid financial management and potential for future growth. On the other hand, TC Energy provides a higher dividend yield of approximately 6.6%. However, its payout ratio is significantly higher at 143.1%, which may limit future dividend growth compared to Capital Power.
When looking at the financial health of the companies, Capital Power demonstrates strong financial stability with a debt-to-total-capital ratio slightly below the industry average. The company’s diversified portfolio of power generation assets and manageable debt level support its ability to maintain and grow dividends. In comparison, TC Energy has a higher debt-to-total-capital ratio above the industry average, posing a risk if not managed prudently.
Furthermore, Capital Power shows impressive profitability metrics such as a higher net profit margin, return on equity, and EPS growth rate compared to industry averages. TC Energy also displays strong profitability but has a lower return on equity and more volatile EPS growth rate.
In terms of valuation, Capital Power appears undervalued based on its trailing and forward P/E ratios compared to industry averages. Conversely, TC Energy has a higher trailing P/E ratio, indicating high growth expectations from investors, but its forward P/E ratio suggests that future growth may not meet these expectations.
In conclusion, Capital Power emerges as a more attractive dividend stock for passive income investors due to its lower valuation and sustainability factors. TC Energy, despite offering a higher dividend yield, faces concerns regarding sustainability and leverage. The potential risks associated with TC Energy’s high payout ratio and lower expected growth make it a less favorable option compared to Capital Power.
