Why Fortis Inc Is a Buy-and-Hold Dividend Champion for Your Retirement

Fortis Inc (TSX:FTS) is a long-term dividend champion because of its growth and wide economic moat.

| More on:
The Motley Fool

Building a stock portfolio for retirement requires some special considerations. Key among them is identifying companies that pay sustainable dividends and possess a wide economic moat, protecting their ability to grow revenue and boosting their bottom lines.

An economic moat is the ability of a business to maintain a competitive advantage over its peers in order to protect its long-term profits. Typically, companies with wide economic moats are found in industries with significant barriers to entry. Wide economic moats also occur when a company or group of companies has been able to establish monopolistic or oligopolistic control. These companies also typically provide goods or services with relatively inelastic demand, such as oil, electricity, banking and payment services, and telecommunications.

One of my favorite industries for identifying buy-and-hold dividend champions is the utilities sector, and my preferred option is Fortis Inc (TSX: FTS). Here’s why.

Solid ongoing operational and financial results

Unlike its competitor TransAlta Corporation (TSX: TA)(NYSE: TAC), which has been bleeding red ink for the last two consecutive years, Fortis continues to deliver solid financial results. The company now pays a juicy dividend yield of 3.9%. Although this is lower than TransAlta’s yield of 5.6%, Fortis has a very sustainable payout ratio of 84%. However, more compelling for investors is that its dividend consistently continues to grow, with a healthy compound annual growth rate of 4% over the last five years.

More importantly, its revenue and cash flow also continue to grow, with both rising a massive 266% and 51% respectively for the second quarter of 2014 when compared to the same quarter in the previous year. The key driver of this significant growth has been higher electricity sales and gas volumes, which will continue over the long term as the demand for energy grows. This bodes well for the sustainability of the company’s dividend yield, as well as the possibility of a future dividend hike. The strong revenue growth also further supports the appreciation of the company’s share price.

A wide and multi-faceted economic moat

As mentioned above, Fortis possesses a wide economic moat as the utilities sector has significantly high barriers to entry. Furthermore, energy, especially electricity, is an important component of our modern lives, powering virtually everything we do. This makes its demand inelastic, virtually guaranteeing continuing revenue for Fortis.

More importantly for long-term investors, Fortis continues to expand its franchise and strengthen its economic moat, with it currently working on completing the acquisition of UNS Energy Corp in Arizona. Upon closing, the transaction will boost the company’s customer base by an additional 657,000 electricity and gas customers, primarily in the state of Arizona.

The transaction is expected to close upon approval being granted by the Arizona Corporation Commission. Upon completion, this transaction will significantly boost the company’s revenue, and ultimately, its bottom line.

For all of these reasons, Fortis Inc is a long-term buy-and-hold dividend champion for any income- or retirement-focused portfolio, with investors set to be rewarded with a juicy dividend yield as the share price appreciates over the long term.

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 Matt Smith has no position in any stocks mentioned.

More on Dividend Stocks

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »