When it comes to investing in the stock market, it is essential to take a long-term view. Equities remain volatile in the short term, but given enough time, they have the potential to generate massive shareholder wealth. For people with a low-risk appetite, investing in utility stocks like Fortis (TSX:FTS)(NYSE:FTS) makes perfect sense.
Let’s take a look at the utility giant’s historical returns if you had invested $10,000 in this Canadian heavyweight 10 years back.
Fortis has increased dividend yields by 5.2% since 2010
If you’d bought $10,000 worth of Fortis shares in July 2010, you could have purchased 388 shares at $25.75 per share. The company then paid dividends of $1.12 per share annually. This means you would have generated $435 in dividend payments in the subsequent 12 months.
Considering the company’s stock gain and accounting for dividend re-investments, your investment would have ballooned to $26,360 today. Further, your annual dividend payments would have risen to $741 for the current year. Over the course of 20 years, investors can increase their wealth to $58,250 if we consider the stock’s historical growth rates.
Fortis is one of Canada’s top Dividend Aristocrats and has increased dividends for 46 consecutive years. It expects to grow dividends at an annual rate of 6% till 2024, making it one of the top income stocks right now.
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Why the stock remains a solid bet
Fortis has a huge presence in North America in the regulated gas and electric utility industry. It serves three million customers in 17 jurisdictions in Canada, the U.S., and the Caribbean. Over 82% of the company’s annual revenues are rate regulated and come from residential sales, making it a good stock to hold amid the ongoing pandemic.
People will continue to pay their utility bills, which will mean Fortis will generate a predictable stream of cash flows, helping it pay dividends to shareholders. Its exposure to the residential segment also helps Fortis offset changes in sales associated with the economic slowdown which will result in lower commercial and industrial sales.
Fortis has a strong balance sheet and enough liquidity to weather the COVID-19 storm. During the earnings call, company CEO Barry Perry stated, “Our conservative approach to running the business ensured we were in a strong liquidity position at the start of the pandemic. At the end of April, we had approximately $5 billion of liquidity, leaving Fortis positioned near the top of our sector.”
Fortis ended 2019 with an adjusted payout ratio of 72% which is pretty reasonable for a utility company. In the March quarter, this ratio stood at a healthy 49.7%, despite a $45 million drop in sales. The company is eyeing expansion in the high-growth renewable energy space, which will drive top-line growth higher.
Lower interest rates will also reduce the company’s debt-servicing costs and increase cash flows and dividend yields. Fortis is a long-term buy given its stable stream of cash flows, low dividend payout, and strong financials.
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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.
The Motley Fool recommends FORTIS INC. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.