Why Fortis (TSX:FTS) Is the Best Dividend Stock to Combat Recession

Though boring, utility investments, particularly at this time, make sense.

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Top regulated utility Fortis (TSX:FTS)(NYSE:FTS) has increased its dividends for the last 47 consecutive years. It will probably continue to do so for the next 50 years or more. What I like in Fortis is its earnings and dividend predictability. Its fair yield, stable earnings, and handsome dividend growth for the future make it stand tall among peers.

Stable earnings and predictable dividends

Utility businesses earn stable revenues and earnings that support stable dividends. They don’t generally invest in riskier or untested projects, which facilitates steady cash flow.

Fortis’s management aims to increase its dividends by 6% per year through 2024. That’s reasonable dividend growth, in my view, as it substantially beats inflation and also outperforms many of its peers. In the current year, the company is expected to pay a dividend of $1.91 per share.

Even if the recession comes in the next few months or years, utility companies are relatively stable. Their earnings are not susceptible to business or economic cycles. Thus, Fortis will likely continue to generate similar earnings, and one can expect consistent dividends from it, even in case of an economic shock.

For instance, during the financial meltdown in 2008, while broader markets and tech stocks fell by more than 50%, Fortis stock was relatively better and returned -15%. Notably, it continued to raise dividends during the financial crisis.

Fortis: A safe-play stock

Fortis intends to invest $18.3 billion in capital projects, which will grow its rate base to an expected $38.4 billion through 2024. That implies an estimated rate-base growth of almost 7% compounded annually for the next five years. A rate base is a value of the utility’s assets with which it is allowed to earn a specified rate of return set by regulators.

Fortis operates in Canada, the U.S., and in the Caribbean, which enables regulatory diversification. Moreover, it generates 65% of its revenues from its operations in the United States. The utility makes almost all of its profits from regulated operations. These large-scale regulated operations allow stable and predictable earnings, which facilitates stable dividends.

Fortis stock was weak last week amid volatile broader markets on rising coronavirus fears. However, it soon recovered and is currently trading at its all-time high. Lower interest rates make utilities comparatively more attractive against bonds. Thus, investors flee to utility stocks to obtain higher yields when rates fall. Fortis stock has soared almost 25% in the last 12 months.

From the valuation standpoint, Fortis stock looks to be trading at a premium compared to its historical valuation. It is currently trading at 20 times forward earnings, while its five-year historical average valuation comes around 18 times.

Foolish takeaway

I agree that investing in utility stocks could be boring, as they generally do not exhibit large swings as tech stocks. But I think for steady long-term returns, utilities are attractive investments. After all, long-term wealth accumulation should be the ultimate goal of any investment strategy. So, I think some part of your portfolio should be in safe plays such as utilities. And Fortis could be one such name to tackle the market uncertainties.

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 Vineet Kulkarni does not hold any position in the stocks mentioned.

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