John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
Some people can't help tinkering with their portfolio. They're constantly selling this and buying that, hoping to hit the jackpot on a stock that doubles or triples in a short period of time.
Dividend investing isn't like that. It's a get-rich-slowly strategy that requires patience and commitment. By holding profitable companies that raise their dividends regularly, investors can boost their income and build wealth over the long run without the stress – and frequent disappointment – that comes with trading frequently.
But even dividend investors want a little excitement from time to time. In my case, I get all the thrills I need by periodically reinvesting cash that has accumulated in my portfolio. That brings us to today's topic.
For the past several months I've been letting cash build up in my Strategy Lab model dividend portfolio. Today, I'll be spending part of it to acquire an additional 10 shares of TransCanada Corp. (TRP), bringing my total to 110 shares. (Disclosure: I also own TransCanada shares personally.) Why TransCanada? For starters, the pipeline operator and power producer has an excellent track record of dividend growth. Fuelled by its growing asset base and steadily increasing cash flow, the Calgary-based company has raised its dividend for 17 consecutive years, including a 10.6-per-cent increase announced in January.
Since I "bought" the shares for my model dividend portfolio in September, 2012, I've received five dividend hikes from TransCanada and the shares have posted an annualized total return – assuming all dividends had been reinvested – of 12.2 per cent. That easily beats the S&P/TSX composite index's total annualized return of about 8.5 per cent over the same period.
But that's all in the past. What about the future?
A lot of attention has focused on two of TransCanada's proposed megaprojects – namely the Keystone XL and Energy East crude-oil pipelines. Keystone XL was recently green-lighted by the Trump administration but still requires approval in Nebraska, while Energy East has been held up by environmental opposition and regulatory delays. They are among $48-billion in medium- to longer-term projects that TransCanada hopes to advance.
But TransCanada also has about $23-billion in smaller, near-term projects it aims to complete by the end of the decade. More than $18-billion relates to natural-gas pipelines and related facilities, including investments tied to the U.S.-based Columbia Pipeline Group that TransCanada acquired last year, expansion of TransCanada's Nova Gas Transmission system and three projects in Mexico. Outside of natural gas, TransCanada is also investing $2.1-billion in liquids pipelines in Alberta and $2.2-billion in Ontario's power sector.
All of this investment bodes well for dividend investors. Reflecting the expected cash flow from these commercially secured projects, TransCanada has said it plans to raise its dividend at "the upper end" of its 8-per-cent to 10-per-cent forecast growth range through 2020.
Based on Tuesday's closing price of $63.55 and TransCanada's annualized dividend of $2.50, the shares currently yield 3.9 per cent. If one conservatively assumes the company will hit the low end of its dividend guidance for the next three years, the payout would grow to $3.15 by 2020, for a projected yield of nearly 5 per cent based on the current stock price.
Although TransCanada's longer-term outlook contains some uncertainties, the risks are balanced by the stable nature of the company's earnings. According to TransCanada, the acquisition of Columbia's regulated natural-gas business means about 95 per cent of EBITDA (earnings before interest, taxes, depreciation and amortization) will come from assets that are either regulated or under long-term contracts.
Given the positive outlook, it's perhaps not surprising TransCanada's shares have recently been hitting new highs. After the stock's big run-up over the past 15 months, some analysts believe the shares – which trade at a price-to-earnings multiple of about 21 based on 2018 estimates – have limited upside.
"We believe the current valuation reflects TransCanada's long-term growth prospects," Edward Jones analyst Rob Desai, who rates TransCanada a "hold," said in a note.
But others are more bullish. According to Thomson Reuters, 13 of the 15 analysts who follow the company have a "buy" or "strong buy" rating on the stock. The average 12-month price target is $69.61, representing a projected return – excluding dividends – of 9.5 per cent.
I won't try to guess what TransCanada's shares will do in the short run. They could rise, fall or go sideways. But over the long run, I expect the dividend will continue to rise and that, ultimately, the share price will also move higher. That's why I'm comfortable adding to my position.
John Heinzl