Last month, I’d discussed why utilities were largely pandemic proof. Essential services have been a reliable target during this crisis, and this sector is no different. Typically, young investors are attracted to growth-oriented equities. Today, I want to discuss why owning utility stocks is a good idea for those with a long time horizon. Let’s jump in.
Why utility stocks are perfect for young investors
Young investors should pursue long-term capital growth in their portfolios. However, it is also important to hold equities that will provide stability. The 2007-2008 financial crisis ushered in an era of historically low interest rates that has grown into a new normal. This has led to an investment and credit boom, but it has also hindered savers. Many fixed-income vehicles fail to even keep up with inflation. Fortunately, utility stocks offer long-term stability and solid income that young investors can count on.
Two utility stocks to hold in your portfolio
Emera (TSX:EMA) is a Nova Scotia-based utility. Its shares have dropped 5% in 2020 as of close on June 26. The stock has been flat in the year-over-year period. However, Emera is an established dividend payer and offers attractive value for young investors right now.
In the first quarter of 2020, the company reported net income of $523 million, or $2.14 per share. This was up from $312 million, or $1.32 per share, in Q1 2019. Cash flow also increased $84 million year over year to $502 million. Emera has also benefited from the weakening of CAD exchange rates. Emera last approved a quarterly dividend of $0.6125 per share. This represents a solid 4.7% yield.
Shares of Emera last possessed a price-to-earnings (P/E) ratio of 14 and a price-to-book (P/B) value of 1.4. This puts the stock in favourable value territory. Young investors should feel good about stashing this dividend stock for the long term.
Hydro One is a utility that boasts a monopoly in Canada’s largest province, Ontario. Its stock has climbed 1.3% in 2020 so far. Shares last had a favourable P/E ratio of 17 and a P/B value of 1.5. Hydro One also offers a quarterly dividend of $0.2415 per share, representing a 4% yield.
Young investors: Target this future dividend king
A dividend king is a stock that has achieved at least 50 consecutive years of dividend growth. These are the kind of income-yielding equities that young investors should hold forever. The TSX does not yet have a dividend king in its ranks, but one top utility is on track to meet this goal in the 2020s.
Fortis (TSX:FTS)(NYSE:FTS) is a St. John’s-based utility holding company. Shares of Fortis have dropped 5.1% in 2020 as of close on June 26. The stock has also been static in the year-over-year period. However, the COVID-19 pandemic has failed to impede its promising trajectory to the middle of this decade.
The company last increased its quarterly dividend to $0.4775 per share, which represents a 3.8% yield. Fortis has achieved dividend growth for 47 consecutive years. Its $18.8 billion five-year capital plan is expected to support growth in its rate base from $28 billion in 2019 to $38 billion by 2024. In turn, this will support annual dividend growth of 6% through the end of the forecast period. Fortis is well on its way to snatching up its well-deserved dividend crown.
Young investors can also rejoice that Fortis boasts a P/E ratio of 13 and a P/B value of 1.3. This puts the dividend beast in attractive value territory.
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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 Ambrose O'Callaghan owns shares of FORTIS INC and HYDRO ONE LIMITED. The Motley Fool recommends FORTIS INC.