Seniors used to rely on GICs, government bonds, or even savings accounts to provide the extra income they needed to supplement pension payments.
Today, those options simply don’t offer the required returns, and investors are turning to dividend stocks and income trusts as sources of income.
The challenge is to find top-quality companies that pay reliable distributions.
With this thought in mind, I think income investors should consider Fortis Inc. (TSX:FTS) and RioCan Real Estate Investment Trust (TSX:REI.UN) for their portfolios.
Fortis
Fortis operates natural gas distribution and electricity generation assets in Canada, the United States, and the Caribbean.
This sounds like a pretty boring business, but the company and its results are creating quite a buzz in the market.
Fortis is growing at an impressive rate. The company spent US$4.5 billion two years ago to buy Arizona-based UNS Energy in a deal that expanded the company’s geographic footprint.
The integration went very well and management has now set its sights on an even bigger prize.
How big?
Fortis just announced an agreement to acquire ITC Holdings Corp., the largest independent pure-play transmission company in the United States, for US$11.3 billion. The stock initially dropped after the announcement, but investors are starting to see the benefits of adding further diversification in both regional and regulatory exposure.
Fortis gets nearly all of its revenue from regulated assets, which means cash flow should be reliable and predictable. That’s a good thing for income investors who count on the quarterly dividends.
The company has increased the payout every year for more than four decades, and management is committed to increasing the payout by at least 6% per year through 2020.
The current quarterly distribution of $0.375 per share yields 3.9%.
RioCan
The REIT sector has taken it on the chin in the past year as investors fret about economic weakness caused by the oil rout and the possibility of higher interest rates.
The pullback in REITs focused on office space is probably warranted, especially for the ones operating in Alberta, but RioCan owns more than 300 shopping malls across the country, and that sector looks pretty solid, despite some general economic headwinds.
Why?
RioCan’s anchor tenants are well-established names that sell groceries, medicine, discount goods, and everyday household items. These businesses tend to be recession-resistant, and the companies are large enough that they can ride out a slowdown in the economy.
Rising interest rates can be a concern because REITs tend to carry substantial debt. Rates are not headed higher anytime soon in Canada, and the pace of the increases south of the border is likely to be very slow, so there shouldn’t be much to worry about on that front in the medium term.
RioCan is in the process of selling its 49 U.S. properties in a deal that will provide net proceeds of $1.2 billion. These funds will be used for new investments and debt reduction.
RioCan pays a monthly distribution of 11.75 cents per unit, which yields about 5.4%.
