After this Stock with a 6.5% Dividend Yield Lost 8% in December, We Bought It

Someone once told me, “there’s more than one way to get to heaven.” Not looking to have a religious discussion, he meant that there are people who focus on the charts, others trade momentum stocks, and some prefer to buy great companies. That is not an exhaustive list, but it’s what makes a market: a buyer and seller to each and every trade.

We’ve always preferred to be contrarians. If a good company has stumbled due to a problem that we feel can be resolved and has not impaired its brand or business model, and the stock drop has been significant enough to catch our attention, we have a closer look.

In December, TC Energy (formerly Transcanada) had its day in the sun. Between the Keystone oil spill in Kansas and the not-so-subtle guidance that the cost of building its Coastal GasLink will come in higher, the stock price fell by 8% during the month.

Oil spills get cleaned up and the Coastal GasLink is being constructed to export liquified natural gas overseas. The latter will be in huge demand by Asia and Europe in the coming years. Meanwhile, there won’t be new pipelines built any time soon. For that reason, the barriers to entry are exceptional and this industry is an oligopoly.

We bought shares at a $53.99 purchase price on December 30 for suitable client accounts, near its 52-week low at the time (it got as low as $52.12 on January 5, 2023). Even though it’s up 6.6% since then, we would still buy the stock today if we didn’t already own it.

Amazingly, at the time we bought it, the stock offered a 6.5% dividend yield. Since the millennium in 2000, that dividend has consistently increased year-after-year. Management recently offered guidance that it will continue to increase the dividend by 3-5% between now and the end of the decade.

TC Energy hasn’t had an easy time the last decade. After a decade of uncertainty whether the Keystone Pipeline would be approved or not, the company changed its name from Transcanada to TC Energy and is now a more focused company.

In a nutshell, most of TC Energy’s earnings come through transporting natural gas via pipeline in the U.S., Canada, and Mexico. It also owns almost half of Bruce Power, which provides one-third of Ontario’s electricity through its nuclear reactors.

Some criticize the debt that pipelines carry. However, almost 95% of cash flow is supported by long-term contracts or regulated rates. In other words, the volatility of commodity prices doesn’t impact the company nearly to the extent that it would a producer. Furthermore, 85% of TC Energy’s debt is fixed rate with a 20-year duration at 4.8% interest.

While clients get paid 6.5% in dividend income, the need for natural gas in North America and the demand for LNG from overseas will drive the stock higher.