Canadian pipeline giant TransCanada (NYSE:TRP) has treated income investors well, paying an increasing dividend for the past 18 years. Furthermore, these haven't been token raises just to keep that streak alive. Overall, the company has increased its payout at a 7% compound annual growth rate since 2000, though its most recent increase was 10.4%.
The company expects to make its next dividend payment in April. However, investors who want to collect it need to act fast since they must be a shareholder of record by the market's close on March 29th.
Drilling down into TransCanada's dividend
TransCanada has worked hard to make its payout more attractive to investors in recent years. While the company has steadily grown it for nearly two decades, it set out on a new course a few years ago to take it up a notch. That path led the company to sell assets that produced less predictable cash flow and reinvest the proceeds into those that deliver a much steadier earnings stream. As a result, the company now gets 95% of its earnings from stable sources like regulated assets and long-term contracts, up from about 90% a few years ago.
In addition to improving the predictability of cash flow, the company has also enhanced its growth prospects by investing heavily in expansion projects and acquiring assets with upside. This plan has the company on pace to increase earnings at an 8% to 10% annual pace through 2021, which should drive dividend growth at around that same rate. Backstopping that forecast are 23 billion Canadian dollars ($17.8 billion) in near-term growth projects the company has under construction, which it can finance with its top-tier balance sheet and a low anticipated dividend payout ratio of less than 65% of annual cash flow. These factors put TransCanada's current dividend and its growth outlook on solid ground.
Two things you must know before buying TransCanada for the dividend
As noted earlier, TransCanada is a Canadian company and thus pays dividends in Canadian dollars. Because of that, there is some variability in the payment due to exchange rate fluctuations. At the moment, that exchange rate is CA$1 to $0.78, meaning that TransCanada's CA$0.69 per share dividend would equate to about $0.54 per share. With the stock recently trading around $42 per share, it implies a 5.1% yield for those choosing to buy this week.
In addition to that, Canada requires that companies like TransCanada withhold a 15% non-resident tax to U.S. investors. Because of that, investors might want to consult their tax advisor before buying. However, most can take a foreign tax credit that entirely offsets this amount on their taxes. Also worth noting, because of a tax treaty with Canada, it doesn't withhold taxes on shares held in a U.S. retirement account, likely making that the best place to purchase the stock.
A great time to start a long-term relationship
If investors can get past the minor issues that come with investing in a Canadian company, TransCanada is an excellent income stock to hold for the long term. While timing isn't everything in investing, this week is a good time to consider starting a position in TransCanada. Not only would that lock in the company's upcoming dividend payment but with shares falling double digits this year due to the stock market sell-off, it's also a good value right now, especially considering the growth it has coming down the pipeline.