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This Is the Utility That Every Portfolio Needs Now

Fortis Inc. (TSX:FTS)(NYSE:FTS) is an impressive investment that should form part of every portfolio. The reasoning behind this comes down to several very significant, yet often overlooked reasons that most investors haven’t connected yet.

Fortis has a sustainable, recurring source of revenue

Most revenue that a utility receives typically comes in from regulated contracts. These contracts, often referred to as power-purchasing agreements (PPAs), stipulate both a duration and rate for which the utility is going to reimbursed for.

PPAs can typically span multiple decades, providing a stable and secure source of revenue for the utility. Fortis gets 92% of earnings from these regulated contracts.

When considering income-producing investments, the stability afforded by the typical utility business model is a huge advantage, attracting droves of investors with the promise of an attractive yield.

Fortis’s current quarterly dividend provides an appetizing yield of 3.90%, and management has committed to an annual growth rate of 6% through 2022. That growth commitment is something that investors should dismiss; Fortis has an established record of consecutive annual dividend increases that goes back over four decades.

That factor alone makes Fortis a great buy-and-forget holding.

Fortis has an appetite for expansion that will continue to feed company growth

Unlike most other utilities that are content with that stream of recurring revenue, Fortis actively seeks out new acquisition targets to continually expand and add to the bottom line. Over the years, this has resulted in several lucrative deals that accomplished that goal.

By way of example, the massive $11.3 billion acquisition of ITC Holdings in 2016 provided Fortis with a multi-year boost to earnings as well as exposure to several new U.S. state markets.

Looking beyond the acquisition market, Fortis also has an impressive portfolio of capital expenditure projects, with several power-generating and pipeline facilities slated to come online over the next few years.

A buying opportunity exists right now

There are two big market events on investors’ minds at the moment — rising interest rates and whether the correction we witnessed in February this year will repeat itself and drag the market down.

Both have created an opportunity for long-term investors looking to invest in Fortis.

When interest rates rise, the cost of borrowing goes up, which could impact free cash flow and put an end to dividend increases, or even worse, slash them.

While a dividend cut seems incredibly unlikely in the case of Fortis, that fear has led to some investors selling their stake, and yet other investors have contemplated dumping Fortis in lieu of other investments that could provide a quicker return.

So, where is that opportunity?

Fortis is still trading at a 5% discount for the year, which has also helped push up the yield on that reliable and growing dividend to 3.9%. That discount is unlikely to persist for much longer, as the stock has already surged over 3% in the last month.

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Fool contributor Demetris Afxentiou has no position in any stocks mentioned.

 

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