Get Reliable and Predictable Dividends From These Utilities

You can get yields of 3-5.8% from Canadian Utilities Limited (TSX:CU) and other utilities, but you should also keep prices in mind. Here’s why.

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Utilities offer necessary products and services and tend to generate stable cash flows as a result. That’s why utilities take three spots of the top five companies that have increased their dividends for the longest time. That’s also why utilities generate about 18% of my portfolio’s income. However, investors should try not to overpay for even the best of the best utilities. Here’s why.

Canadian Utilities

I identified Canadian Utilities Limited (TSX:CU) as a quality utility last year. It is the Canadian company with the longest streak of growing dividends–44 years to be exact.

This track record really resonated with me, so I started buying its shares last year. My average cost is $38.72 per share, so I’m still about 8% below water, but I’m not worried. I’d initially bought the utility for its 3% dividend, and I expected it to continue increasing the dividend at a 7-10% rate. In the first quarter, it raised its dividend by 10%.

In hindsight, I could have picked it up between $30 and $32 when it dipped a few months ago. Of course, I didn’t have a crystal ball; however, it was near its 52-week high and, according to its normal long-term multiple, it’s still trading at a premium of about 15%.

Yet, over 10 years Canadian Utilities has primarily yielded in the range of 2.8-3.9%. So, whenever it yields close to 3.9%, it should be a decent buy. Canadian Utilities would yield 3.9% at $33.33 per share, and investors should consider the utility at or below that level to lock in a higher yield.

Brookfield Renewable

Brookfield Renewable Energy Partners LP (TSX:BEP.UN)(NYSE:BEP) was a decent value at about $35 per share, so I started buying at that level. When it fell lower, I took the opportunity to buy more shares to lower my average cost and to boost my income.

Brookfield Renewable is very different from Canadian Utilities. Brookfield Renewable owns and operates a hydro portfolio complemented by a wind portfolio. The utility has only increased its dividend for six consecutive years, but it expects to increase the dividend by 5-9% on average over the next few years. It last raised its dividend by 7.2% in the first quarter.

Brookfield Renewable pays U.S.-dollar-denominated distributions, so Canadian investors get a boost in income with the stronger U.S. dollar. Using a more conservative foreign exchange of US$1 to CAD$1.25, at about $38.50, Brookfield Renewable still yields 5.8%.

Income investors can still consider its fully valued shares today for the above-average income; however, it would be a better buy at the $35-36 level.

Conclusion: What’s a good utility for today?

An investor can do worse than buying Canadian Utilities and Brookfield Renewable for income. However, a better deal in utilities today, in my opinion, is ATCO Ltd. (TSX:ACO.X).

ATCO owns about 53% of Canadian Utilities but is priced at a cheaper multiple and has a faster-growing dividend. Canadian Utilities hiked its dividend by about 10% per year in the past few years, while ATCO hiked its dividend by about 15% per year.

ATCO has increased its dividend for 22 consecutive years and is one of the top five Canadian dividend-growth companies. Although ATCO yields only 2.9%, it has a lower payout ratio than Canadian Utilities, so it’s likely to continue growing its dividend at a faster pace than Canadian Utilities.

Additionally, over 10 years ATCO primarily yielded about 1.9-2.9%. So, whenever it yields close to 2.9%, it should be a decent buy. At under $39, ATCO yields 2.9%, so investors should consider this utility today. However, any dips to the $36 level or lower would be even better.

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 Kay Ng owns shares of ATCO LTD., CL.I, NV, Brookfield Renewable Energy Partners LP, and CANADIAN UTILITIES LTD., CL.A, NV.

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