Growing market volatility and fears of a broad-based market correction are creating greater uncertainty among investors. This only means investors should apply a more rigorous stock selection process and focus on quality businesses that reward shareholders through a long history of steadily appreciating dividends.
Enbridge
Dividend machine Enbridge Inc. (TSX: ENB)(NYSE: ENB) not only holds a dominant position in Canada’s energy patch as the largest provider of pipeline and other midstream services, but has a wide multifaceted economic moat. This is because the energy industry is highly regulated, with steep barriers to entry.
More significantly, while oil producers in the energy patch continue to see their earnings impacted by declining crude prices, Enbridge is the dominant pipeline company and an integral means of transporting crude to crucial markets. This allows it to ‘clip the ticket’ on each barrel of crude and cubic foot of natural gas it transports, virtually guaranteeing growing earnings with Canadian crude production expected to grow by 4% annually.
These key strengths are the reason Enbridge has been able to consistently pay a dividend since 1953, which it has hiked annually for the last 18 years, giving it a juicy yield of 2.6%, which with a payout ratio of 93% appears sustainable. I also expect to see Enbridge continue growing its dividend for all of the reasons discussed.
Fortis
Diversified Canadian energy utility Fortis Inc. (TSX: FTS) has paid a steadily appreciating dividend for the last 42 years, giving it a tasty yield of 3.8% coupled with a sustainable payout ratio of 84%. These regular dividend hikes give it an impressive compound annual growth rate of almost 6%, which is a far better return than many other assets in today’s low interest rate environment.
But the good news for investors doesn’t stop there.
Fortis has a wide economic moat that protects its competitive advantage and when coupled with the inelastic demand for electricity, a key component of modern energy dependent lives, allows it to continue growing earnings.
The company is also working hard to reinforce that moat, having recently completed the acquisition of UNS Energy in Arizona, giving it an additional 657,000 electricity and gas customers in that state. The acquisition has boosted the value of Fortis’ underlying assets by 33% and is expected to be earnings accretive in its first year, boding well for further growth in Fortis’ bottom line.
It also gives Fortis a substantial presence in the eighth fastest growing state in the U.S., which should see earnings continue to grow over the long term, fueling further dividend hikes.
Each of these attributes clearly make Fortis a dividend champion that is well positioned to weather any market correction or sustained economic downturn while continuing to reward investors.
Both companies have solid dividend payment histories and regular annual dividend hikes, highlighting the strength of their underlying businesses and ability to continue growing earnings. This is why I believe they are dividend champions and deserve a place as cornerstone investments in any share portfolio.
