Income investors are having a difficult time finding a respectable yield that doesn’t come with big risk.
It wasn’t always this way. In the past, retirees could rely on GICs or even savings accounts to provide the interest income they needed to bridge the gap between their pension payments and their spending.
Those days are long gone, and it doesn’t look like interest rates are heading higher in Canada anytime soon.
As a result, income investors are turning to dividend stocks to find the desired yield, but this comes with more risk as we’ve seen with the meltdown in the oil sector over the past two years.
So where can investors find decent yield without taking on too much risk?
Let’s take a look at Fortis Inc. (TSX:FTS) and Royal Bank of Canada (TSX:RY)(NYSE:RY) to see why they look like good picks.
Fortis
Fortis owns natural gas distribution and electricity generation assets in Canada, the United States, and the Caribbean.
The company has expanded its presence in the U.S. in recent times with a couple of large and timely acquisitions. Two years ago Fortis spent US$4.5 billion to buy Arizona-based UNS Energy and recently announced plans to purchases ITC Holdings Corp., the largest independent pure-play electricity transmission company in the United States.
The integration of UNS went very well, and investors are feeling good about the ITC deal as the stock is trading near its 12-month high.
Fortis gets nearly all of its revenue from regulated assets, which means cash flow should be both predictable and reliable.
That’s good news for income investors and a big reason why the company has increased the dividend every year for more than four decades. Fortis currently pays a quarterly distribution of $0.375 per share that yields 3.7%.
Royal Bank
Royal Bank earned just under $10 billion in profits last year, which is pretty impressive considering the economic headwinds facing the banks. The secret to the success lies in Royal Bank’s balanced revenue base.
The company’s largest group is its Canadian retail business, but it also has very strong wealth management and capital markets divisions as well as a growing insurance operation.
In the United States, Royal Bank is expanding its reach with the recent acquisition of City Nation Corporation, a California-based private and commercial banking firm.
Some investors are concerned the meltdown in the oil patch is going to hit the Canadian banks. Royal Bank has certainly increased its loss provisions for loans connected to the sector, but its total drawn exposure to oil and gas companies is less than 2% of the overall loan book, so the impact is minimal.
Royal Bank recently hiked its quarterly dividend by 3% to $0.81 per share. The distribution is very safe and offers investors a yield of 4.3%.
