When you’re hunting for the best dividend-paying stocks, what’s the most important factor that should drive your decision?
For many investors who are in the game for a long run, it’s the stability of the targeted company’s dividend payout. This single characteristic tells us a lot about the company’s business. It shows us how successful the company is in generating positive cash flows from its operations that it uses to reward its investors quarter after quarter.
Many great companies you find in income-producing portfolios have long histories of not only maintaining their dividends, but also increasing them regularly.
Let’s compare the energy sector’s two top names in the dividend space — Altagas Ltd. (TSX:ALA) and Fortis Inc. (TSX:FTS)(NYSE:FTS) — to analyze which one is a better option for long-term income investors.
Payout ratio
The payout ratio tells how much of a company’s earnings are going in dividends. This is one of the most important metrics that income investors use to find out whether a high dividend yield is in a danger of being cut. This number also shows how much more that company can afford to pay in dividends.
On this metric, Fortis is a clear winner. With a payout ratio of 81%, Fortis is in a much better position to sustain its dividend when compared to a whopping 230% payout ratio for Altagas.
That’s one of the main reasons that some investors are doubting that Altagas’s 7% yield is sustainable when compared to 3.58% dividend yield offered by Fortis.
A dividend history of a company tells how it truly values shareholders and is dedicated to improving its annual payouts. Fortis has a very long history of rewarding its investors — going back to 1972.
Future growth
Both utilities have aggressive growth plans. Fortis bought American power-line operator ITC Holdings Corp. last year for almost $7 billion, while Altagas’s $4.6 billion deal to buy to buy WGL Holdings Inc., the owner of the Washington utility that supplies natural gas to the White House, is pending for the regulatory approval.
The uncertainty about Altagas successfully completing this transaction and the high debt levels of WGL holdings are the two main factors which have depressed the Altagas shares. While Fortis shares rose 7% this year, Altagas tumbled 13% in the same period.
Bottom line
For income investors, Fortis seems to be a much safer choice after analyzing the companies on the metrics we discussed above. Having said that, Altagas has a much higher upside potential for capital gains once the company gets the approval for its WGL Holdings acquisition from the U.S. regulators.
But, at this point, the company’s share price suggests that investors have a considerable doubt about this transaction going through successfully.
I think dividend investors are better off sticking with Fortis, which has a more reliable revenue stream and a safer dividend payout.
