Utilities are often noted as some of the most stable and promising income-producing investments to include in your portfolio. Part of the reasoning stems from the defensive nature of utilities, which continue to churn out a stream of recurring revenue irrespective of what the market has in store. That recurring revenue, which is backed up by long-term regulated contracts known as Power Purchase Agreements (PPA) helps those utilities provide a generous dividend to investors, which, given its stable nature, can translate into a solid base for any income-focused, defensive portfolio.
Two of the leading utilities on the market at the moment are Fortis (TSX:FTS)(NYSE:FTS) and Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN). Both companies offer a compelling mix of income and growth-generating opportunities for investors, so let’s take a look at both to determine which is the better investment.
Algonquin Power – an interesting pick for growth and income seekers?
Algonquin is an interesting pick for those investors looking for the defensive (and income-producing) benefits of a traditional utility while also wanting to benefit from the growing importance of investing in renewable energy stocks.
Algonquin’s 35-facility portfolio consists of solar, wind and hydroelectric elements that collectively cater to over 750,000 customers across the U.S. across two segments – Liberty Utilities, which provides gas, water, and electric service, and Liberty Power, which is focused on power generation.
The renewable energy aspect is an important differentiator that shouldn’t be ignored, as other utilities that are predominately fossil-fuel burning will need to spend considerably over the course of the next few decades on replacing their aging facilities with renewable ones or risk losing that recurring revenue stream.
In terms of a dividend, Algonquin offers a quarterly payout with a handsome 4.42% yield that has maintained a series of near-annual increases that stems back nearly a decade. Even better is the fact that Algonquin is expecting further growth of that dividend to continue over the next few years at an impressive double-digit rate.
From a growth standpoint, Algonquin has seen a near 9% increase year-to-date, but over the course of a longer five-year period, the stock has seen incredible growth of over 95%. Algonquin currently trades just below $15 at writing, near its 52-week high.
Fortis – the titan of the sector with a solid history
Fortis is clearly the larger of the two utilities, and is currently one of the largest 15 utilities on the continent, with coverage that spreads across Canada and the U.S. into the Caribbean. That incredible growth is thanks to Fortis’ aggressive stance toward growth through acquiring other players on the market – which in turn has allowed Fortis to expand into new markets with relative ease and continue to fund one of the most popular reasons to invest in the company: its dividend.
The current quarterly distribution amounts to a healthy 3.61% yield and a source of pride for the company is that Fortis has maintained an uninterrupted stream of annual increases to its dividend spanning back well over four decades, something that income-seekers will absolutely love. That’s not to say that Fortis couldn’t also be viewed as an option for growth-minded investors. Year-to-date, the stock is up over 10%, and over a larger five-year period, those gains extend to over 55%.
Which stock is the better investment?
Both Fortis and Algonquin make great investment options, each with their own strengths and limitations, but at this juncture, I believe that Algonquin presents the greater benefit to investors, which I attribute down to several key points.
From a growth standpoint, while Algonquin is smaller in size than Fortis, the fact that Algonquin’s portfolio is already entirely based on renewable energy puts the company in a primary position to reap the benefits of a green economy. Adding to that appeal is Algonquin’s diversified nature across its power and utility segments, and finally, there’s Algonquin’s appetizing dividend, which despite lacking the history that Fortis does, has provided investors with annual hikes over the years and plans to continue doing so for the foreseeable future at an aggressive rate.
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 Demetris Afxentiou owns shares of Algonquin Power & Utilities.