A Stock With 42 Straight Years of Dividend Hikes

Don’t skip over this stock because of its low yield.

| More on:
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

MP900387760Almost to a fault, equity investors are relentlessly focused on dividend yield.

It has reached a point now where investors will skip over a wonderful business just because it doesn’t sport an eye-catching payout.

Case in point: Canadian Utilities (TSX: CU).

Today, the yield on western Canada’s largest utility is only a measly 2.7%. Yet investors who give this stock a pass based on yield alone are missing out on some phenomenal dividend increases.

Last January, Canadian Utilities hiked its quarterly dividend 12.5% to $0.27 per share — one of the largest increases in the company’s history. Barring some sort of global catastrophe, the company will raise its dividend again next year, marking the 42nd consecutive increase since 1972.

Over that time, the dividend has grown more than 16-fold. If you had bought and held the stock over that time, the annualized yield on your original investment would be more than 35% today. More increases are almost certainly on the way as the company’s sales and earnings continue to climb.

Fuelled by Alberta’s growing economy, Canadian Utilities regulated gas and electric utilities and pipelines have nearly doubled their regulated asset base over the past three years. The company is investing more than $5 billion in new electric transmission infrastructure projects in Alberta to 2015. The company has also been expanding into Australia and northern Canada and is looking to grow in the green energy space.

More importantly, this expansion is into regulated businesses — assets in which the utility is allowed to earn a specific rate of return as set by the government. Today, regulated operations account for about 60% of the company’s earnings, and this is expected to grow to 70% by 2015. This means that the company’s risk profile is actually declining every year.

Finally, this dividend should be very safe given that the payout ratio is less than 40% of the company’s estimated free cash flow in 2014. If everything plays out as planned, Canadian Utilities should be able to increase its dividends faster than its earnings growth rate for the foreseeable future. A low payout ratio also gives the company plenty of cushion if industry conditions take a turn for the worse.

Of course, no stock is a sure thing. Because of their steady cash flows, utility stocks trade much like bonds, which fall when interest rates rise, and because regulated returns aren’t adjusted immediately, rising interest rates could impact profitability.

Risks aside, the company has been able to grow sales, earnings per share, and dividends in good times and bad. It’s this type of long-term consistency that sets Canadian Utilities apart from its competitors.

If you’re looking for a fat yield today, then I would recommend looking elsewhere. But if you have patience, this stock is an excellent addition to any income portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robert Baillieul has no positions in any of the stocks mentioned in this article. 

More on Investing

Hands holding trophy cup on sky background

3 Growth Stocks That Could Be Huge Winners in the Next Decade and Beyond

Here are three top TSX growth stocks that may be worth a look, given the significant valuation declines these stocks…

Read more »

edit Back view of hugging couple standing with real estate agent in front of house for sale
Dividend Stocks

Why Real Estate Stocks Are a No-Brainer Addition to Your Portfolio

Real estate stocks, especially REITs, offer some distinct advantages over other types of stocks, making them must-have additions to most…

Read more »

Man data analyze
Stocks for Beginners

Beginners: 2 Market-Beating Stocks Just Getting Started

Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) and Constellation Software (TSX:CSU) are proven market beaters that could continue their ways.

Read more »

oil and natural gas
Energy Stocks

Small OPEC+ Oil-Output Hike: Buy More Energy Stocks?

Energy stocks could soar higher, because oil markets will remain tight due to the small production increase by OPEC+.

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

3 Top TSX Dividend Stocks to Buy for Monthly Passive Income

Top TSX stocks with monthly dividends now trade at cheap prices for investors seeking passive income.

Read more »

edit Person using calculator next to charts and graphs

Where to Invest $500 in the TSX Right Now

Long-term investors can look to buy stocks, including Suncor Energy and Shopify, as they are poised to outpace the broader…

Read more »

Canadian Dollars
Dividend Stocks

Create Free Passive Income and Turn it Into Thousands With 1 TSX Stock

If you can't afford to invest, you can certainly create passive income another way and use that to invest in…

Read more »

falling red arrow and lifting

2 Oversold TSX Stocks That Should Bounce Back

Stocks that are oversold without an external catalyst like a market crash or a weak sector might be risky buys,…

Read more »