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Get a +5% Yield From This Safe Utility

Emera Inc. (TSX:EMA) stock has been under pressure in the first half of the year partly because of interest rates trending higher and partly because of reporting a loss in the fourth quarter. However, the loss was due to a non-cash expense that resulted from the tax reform in the United States. The business itself is doing just fine.

After a four-month consolidation, the regulated utility stock finally breathed life again by popping about 7% since mid-June. So, the market seems to be finding the stock to be too cheap.

When I compared Emera and Fortis Inc. in May, I said, “Emera will likely deliver greater returns due to its bigger dividend yield and expected higher growth rate.”

The market has already begun reflecting Emera’s value by popping about 5.7% since that article was published. In comparison, Fortis stock has only appreciated about 0.7%.

Emera offers an attractive dividend

Emera offers a compelling dividend. In fact, its dividend yield of nearly 5.3% is at the high end of its 10-year dividend yield range, which may indicate the stock is still a good value despite the run-up of its share price.

Emera has increased its dividend per share for 11 consecutive years. Its 10-year dividend growth rate is 9%. The company’s dividend per share in the last 12 months is 6.1% higher than it was in the previous 12 months.

Although management aims to grow Emera’s dividend by 8% per year on average through 2022, it’d be better if it can reduce its payout ratio first, as the utility’s payout ratio is estimated to be about 80% this year, which is much higher than Fortis’s payout ratio of 68%.

Notably, Emera offers a dividend reinvestment plan, which as described on its website, “There may be a discount of up to 5% from the average market price for shares purchased in connection with the reinvestment of cash dividends.” This is a great opportunity for long-term investors to build their positions.

How much upside does Emera have?

The analysts at Thomson Reuters Corp. have a mean 12-month target price of $47.80 per share on the stock, representing near-term upside potential of about 11% from the recent quotation of roughly $43 per share.

Investor takeaway

Emera is a stable utility that offers a safe +5% yield. Although the stock still has some upside potential, it has run-up quite a bit for a utility in the last two weeks or so.

Therefore, the stock could experience some weakness in the very near term as it runs into some resistance at the $43-44 per share level. Interested investors can probably buy the stock at a slightly cheaper price in the very near term.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Emera.

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