Should You Buy TC Energy for its 7.5% Dividend Yield?

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Written by Andrew Walker at The Motley Fool Canada

TC Energy (TSX:TRP) is down more than 30% from the 2022 high. Contrarian investors seeking passive income and a shot at decent capital gains are wondering if TRP stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.

TRP stock

TC Energy trades near $59.50 at the time of writing compared to $74 at one point last year.

The Bank of Canada and the U.S. Federal Reserve are responsible for much of the pain due to the steep increase in interest rates in both countries. Central banks are raising interest rates to cool off the economy and get inflation back down to the 2% target. As borrowing costs increase, households are forced to cut discretionary spending in order to cover higher debt expenses. Reduced demand for goods and services leads to fewer job openings or even job cuts. This should ease the demand for higher wages, which is partly driving inflation.

The impact of rate hikes on dividend stocks tends to come from two angles.

Soaring interest rates give investors with savings an opportunity to get better returns on their money from safe investments, like Guaranteed Investment Certificates (GICs). As the no-risk rate moves higher, the risk premium investors demand from dividend stocks can increase. The result is a drop in the share price to the point where the yield rises enough to attract investment.

On the operational side, higher interest rates drive up borrowing costs for companies like TC Energy that use debt to finance growth initiatives. Pipeline projects often cost billions of dollars and take years to build before they start to generate revenue. Rising debt costs can reduce profits and cut into cash available for distributions.

Coastal GasLink

TC Energy recently reached mechanical completion on its Coastal GasLink pipeline project. This is a relief for investors who have watched the cost of the development more than double to $14.5 billion. Management has worked hard this year to raise funds through asset sales to shore up the balance sheet. TC Energy is also planning to spin off the oil pipeline business and might monetize other assets in Canada and Mexico.

Dividend safety

TC Energy has increased the dividend annually for more than 20 years. The board intends to boost the payout by 3-5% per year over the medium term, even as the business works through the current challenges.

TC Energy reported solid results for the first nine months of this year and expects the ongoing capital program to drive revenue and cash flow growth to support higher dividends in the coming years. At the time of writing, investors can get a 7.5% dividend yield from TRP stock.

Is TRP stock a buy right now?

Ongoing volatility should be expected until the central banks give a clear signal that they are done raising interest rates. However, TC Energy already looks cheap and pays a great dividend that should continue to grow.

If you have some cash to put to work, TRP stock deserves to be on your radar. As soon as interest rates begin to fall, this stock could soar.

The post Should You Buy TC Energy for its 7.5% Dividend Yield? appeared first on The Motley Fool Canada.

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The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.  Fool contributor Andrew Walker has no position in any stock mentioned.