It’s no secret that some popular utility stocks are out of favour these days. The sell-off in these dividend stocks which started during the past 12 months seems to be losing some steam, and some top dividend stocks look incredibly cheap.
If you’re on a hunt for attractive dividend stocks in the utility space, then I have the following two suggestions for you to consider.
Algonquin Power
Algonquin Power and Utilities Corp. (TSX:AQN)(NYSE:AQN) is a diversified generation, transmission, and distribution utility. Through its two business groups, the company provides rate-regulated natural gas, water, and electricity services to over 700,000 customers in the U.S.
Algonquin also runs a clean-energy unit; it has a portfolio of long-term contracted wind, solar, and hydroelectric generating facilities, managing more than 1,250 MW of installed capacity. It generates about 70% of earnings from regulated utilities and 30% from contracted renewable power.
The company recently increased its stake in London-based Atlantica Yield PLC to 41.5%, up from its initial purchase of 25% in November, further expanding its global operations.
After a ~10% decline in its share price this year following a surge in the bond yields, Algonquin’s valuations look quite compelling. With the forward price-to-earnings multiple of 16, it trades even below its P/E range for the past five years.
The company’s recent growth momentum and its international expansion suggest that the utility won’t have a trouble maintaining its dividend-growth target of 10% for the next five years.
Trading at $12.68, Algonquin stock offers a good value to dividend investors who want to lock in its juicy 4.7% dividend yield.
Emera Inc.
Another utility stock which has become extremely cheap after this recent pullback is the Halifax, Nova Scotia-based Emera Inc. (TSX:EMA).
The utility has been growing its operations in North America and the Caribbean, making the majority of its adjusted earnings from rate-regulated businesses. Regulated earnings growth is expected to support the company’s 8%-per-year dividend-growth target through 2020.
But Emera, just like other utility stocks, is under a selling pressure, shedding about 14% of its value this year. After this pullback, Emera now offers a 5.25% annual dividend yield, which comes with a multiple of 14.18 times estimated 2018 earnings. This ratio is close to the company’s historical low of about 14 last reached during the financial crisis.
Trading at $40.76 at the time of writing, Emera is well on track to produce an 8% growth in its annual payout. During the past five years, that growth rate was 9.4%.
The bottom line
It’s hard to predict when the central bankers in North America will be done with the current rate-hike cycle. Higher interest rates diminish the investment appeal of bond-like utilities, which borrow heavily to fund their expansion. That said, investors should also be ready to pick some cheap dividend stocks whose prices reflect the current macro environment. At current levels, I think both Algonquin Power and Emera stocks offer a balanced risk/reward equation for long-term investors.
