Investors are searching for safe dividend-growth stocks to help them plan for retirement.
Here are the reasons why BCE Inc. (TSX:BCE)(NYSE:BCE) and Fortis Inc. (TSX:FTS) should be on your radar.
Low interest rates
BCE and Fortis are actually benefiting from the Brexit vote because markets now believe interest rates will remain lower for longer, and that’s generally good news for telecom stocks and utilities.
Why?
Communication companies and power distributors are dividend mainstays, and they often compete with bonds and GICs for investment funds. When interest rates are low, investors can’t get adequate returns from fixed-income investments, so they turn to stocks like BCE and Fortis for the attractive yield.
Low interest rates also reduce the cost of borrowing. Since utility and telecom companies have to invest billions to build out communications networks and power infrastructure, the low-rate environment reduces the costs of financing projects. This has a positive impact on cash flow and the benefit tends to flow through to investors.
Growth in safe markets
BCE and Fortis are viewed as safe-haven investments.
BCE is the leading player in the Canadian communications industry and continues to expand its reach through organic growth and acquisitions. The company’s recent $3.9 billion bid to buy Manitoba Telecom Services is a perfect example. Assuming the MTS deal goes through, BCE will have a strong base to extend its reach into western Canada.
Fortis operates power generation and natural gas distribution assets in Canada, the United States, and the Caribbean. The company has focused much of its growth in recent years on the U.S., including the 2014 purchase of Arizona-based UNS Energy for US$4.5 billion and the recent US$11.3 billion deal to acquire the country’s largest independent pure-play transmission company.
Reliable revenue
The two companies have stable, recurring revenue streams and are at little risk of competitive disruption.
BCE operates in a cozy market with few serious competitors and huge barriers to entry. Once in a while the government threatens to allow an international company to move in and create trouble, but the investment required to build a national network would be too large considering the relatively small-sized Canadian market.
Fortis gets the majority of its revenue from regulated assets, so cash flow is predictable and reliable. Once the infrastructure is in place, the asset pretty much has a monopoly on the local customer base. The stock also offers investors a great way to play the strong U.S. currency. At the moment, every dollar of profit earned south of the border converts to a tidy CAD$1.30.
Dividend growth
Both companies are dividend champions. BCE normally raises the dividend in line with free cash flow growth and offers a yield of 4.5%.
Fortis has raised its payout every year for more than four decades. The current dividend yields 3.5%.
