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Retirees: Should You Buy Bonds or Fortis (TSX:FTS)?

It doesn’t take much to build to get above-average returns in your TFSA over a prolonged period. While other investors herd into the sexiest securities at any instance in time, Foolish investors know that it’s as simple as buying and holding Fortis (TSX:FTS)(NYSE:FTS) whenever the stock hits a price that’s at or below its fair value.

Fortis is truly the dividend stock to own if you’re looking for a good night’s sleep. While the electric and gas utility is technically riskier than fixed-income securities like bonds, I’d argue that Fortis offers conservative investors greater peace of mind and is thus less risky than bonds, especially the long duration ones with sizeable coupons.

Why?

I subscribe to the philosophy that bonds, although perceived as risk-free by the general public (which is true to a certain extent), are actually riskier than blue chip dividend stocks like Fortis over a longer-term investment horizon.

Warren Buffett “would choose equities in a minute” over bonds on any given day regardless of what economists are forecasting in the year ahead.

Bonds become riskier as time goes on, while equities become less risky with time (as those dividend payments pile up).

With that in mind, it’s not a mystery as to why Buffett, a long-term investor at heart, chooses equities over bonds in a heartbeat, even at the age of 88.

Back to Fortis. It’s the epitome of a safe equity, and unlike fixed-income securities such as bonds, Fortis raises the bar on its dividend every single year by a mid-single-digit rate.

The company has paid dividends for four consecutive decades — a streak that few other dividend payers can match.

In essence, the company offers a perpetuity that grows at 6% per year to go with capital appreciation that’s for the investor to keep when they deem it’s time to cash out completely.

Management has now “promised” investors with a 6% raise every single year to 2023. And as the company continues finding new ways to grow, I suspect the dividend growth guidance will continue into the next decade and beyond.

What makes Fortis better than a bond?

The highly regulated nature of Fortis’s operations allows the company to grow its profitability consistently with little regard for what’s in the cards for the economy.

Through ITC Holdings, Fortis has a foundation to grow in the U.S. transmission market, and as the company continues spreading its wings in south of the border, I expect further outperformance relative to the TSX index.

At the time of writing, Fortis trades at 19.6 times next year’s expected earnings and 12.8 times EV/EBITDA. While the stock isn’t cheap relative to its peers or its historical average, I do think Fortis is an attractive buy today given that the price of admission will likely further increase for quality defensive dividend stocks.

Corporate earnings are beginning to grind to a halt, and in an environment where good news is bad news (everybody wants the Fed to cut rates), boring defensive names like Fortis will be those that will probably see the most growth.

As aggregate earnings begin to slow, Fortis will continue to post EPS growth as if it were in its own world, and should the Fed find a reason to cut rates by 50 basis points, seemingly expensive defensive plays like Fortis could become a whole lot more expensive.

Foolish takeaway

Bonds may make sense to own given your own set of circumstances, but nine times out of 10, Fortis would be a better use of your investment dollars.

With bonds, you’re taking upside risk (risk of missing out on upside), and with Fortis, you’re tempering both upside and downside risk. To me, the answer is clear: it’s Fortis all the way, even at today’s “frothy” multiples.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette owns shares of FORTIS INC.

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