Renewable energy stocks and utility stocks are down considerably in recent weeks. Investors seeking attractive dividends for portfolios focused on passive income are wondering which stocks might be undervalued and good to buy today.
Algonquin Power
Algonquin Power (TSX: AQN) trades near $14.80 per share at the time of writing compared to $20 in April. Investors who buy the stock at the current price can get a 6.65% dividend yield. Algonquin Power raised the dividend by 6% in 2022. This follows a decade of annual dividend increases of 10%.
The company is in the process of buying Kentucky Power for US$2.65 billion, including the assumption of about US$1.22 billion in debt. Algonquin Power expects the deal to close in the first part of 2023 and will increase the regulated rate base by 32% and boost the customer base by 19%. At the time the deal was announced, Algonquin Power said the purchase would shift the business mix to about 80% regulated operations. This means Algonquin Power will more closely resemble a utility company than a renewable energy play.
Management has announced an agreement to sell part of its ownership interest in a portfolio of three wind farms in the United States for US$277 million and another in Canada for $107 million. The monetization of the assets will help fund the Kentucky Power transaction and further reduce Algonquin Power’s renewables investments.
Algonquin Power has a US$12.4 billion capital plan in place through 2026 to help drive additional revenue and cash flow growth.
The stock appears oversold right now and could rally once the Kentucky Power deal closes in 2023.
Emera
Emera (TSX: EMA) trades near $54 per share at the time of writing compared to the 2022 high of $65. The stock looks oversold after a steep decline in the past month that was likely due to investor concerns connected to the damage caused by the recent hurricane.
At the time of writing, the stock offers a solid 5% dividend yield. Management approved a 4% dividend increase in September with the annualized payout increasing from $2.65 to $2.76 per share. In addition, the board extended the dividend-growth guidance of 4-5% per year through at least 2025.
Emera is based in Nova Scotia and has $36 billion in electricity and natural gas distribution assets located in Canada, the United States, and the Caribbean. Adjusted net income for the first half of 2022 came in at $398 million compared to $380 million in the same period last year. Earnings per share for the first half of the year were $1.51 compared to $1.49 in 2021.
Is one a better buy?
Algonquin Power and Emera pay attractive dividends that should continue to grow. They have reliable revenue streams from regulated assets. This means cash flow should be steady, regardless of the state of the economy in Canada and the United States.
Both stocks look undervalued and deserve to be on your radar. If you only buy one, I would make Algonquin Power the first choice today. AQN stock offers a higher yield right now and probably has better upside potential from the current share price.
