A Great 8% Yield to Add to Your Portfolio for the Long Term

TransAlta Renewables Inc (TSX:RNW) has seen its share price decline more than 11% in just the past month, which has pushed its already high yield up to over 8%. The company makes payments on a monthly basis and it could be a great opportunity to secure some recurring cash flow for your portfolio.

Naturally the one question investors will be wondering is whether at such a high dividend yield, whether the payouts are sustainable. While people are sometimes dismissive of stocks that have high dividend yields, that alone isn’t enough to suggest that a payout can’t continue. Since the stock price is inversely related with the dividend yield, that percentage can change very quickly.

The best way to gauge a company’s ability to continue paying dividends is by looking at its free cash flow.

In the trailing twelve months, TransAlta has generated just under $300 million in free cash. During this time, its dividend payments have totaled $202 million, which equates to a payout ratio of 68%. This is an improvement from 2016 where the company generated $267 million in free cash and paid out $194 million, for a payout ratio of 73%.

The good news for investors that the company is on pace for yet another year of strong free cash flow growth.

While the share price may have struggled in the past year, with renewable energy continuing to be in demand, the long-term potential for the company remains very strong and that should make the stock a very appealing investment to hold in your portfolio for years to come.