2 TSX Utilities I’d Buy Over Algonquin Stock Right Now

Algonquin Power stock has a huge 9.8% dividend, but investors need to be cautious. Here are two top TSX utilities I’d prefer to buy today instead.

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Income-focused investors might be tempted by the massive 9.8% dividend yield offered by Algonquin Power and Utilities (TSX:AQN) stock. However, caution is advised. Algonquin stock has fallen 46.5% this year, and it is not without a reason.

Beware of the high dividend for Algonquin stock

Algonquin has been pushing an aggressive growth agenda. The company has taken on a lot of debt to fund its capital plan and a recent acquisition spree. Unfortunately, this strategy came at the cost of Algonquin’s balance sheet.

In its third-quarter results, Algonquin revealed that 22% of its debt was variable rate. Fast-rising interest rates have been fast consuming its earnings power. Adjusted net earnings fell by 25% in the quarter.

Presently, its dividend is not fully funded by cash flows or earnings, which puts into question its sustainability. Given the stock’s huge decline, the market is clearly skeptical that it will maintain its current dividend rate.

Consider Fortis if you want a very safe long-term dividend stock

Given this dynamic, Algonquin stock is a relatively risky bet for dividends currently. If you are looking for a sustainable dividend (albeit at a lower rate), you may want to consider Fortis (TSX:FTS) stock instead.

Its portfolio is made up of transmission and distribution utilities across North America. 99% of its assets are regulated and it collects a steady stream of earnings.  

While Fortis stock does not have the same growth profile as Algonquin did, it still has a large $22.3 billion capital plan. It expects to grow its rate base by a predictable 6% compounded annual rate for the next several years.

Its net debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 6.6 is high. However, that is significantly lower than Algonquin stock’s ratio of 8.5. Likewise, almost all its debt is fixed with a very long-dated maturity profile.

Fortis has a 4.11% dividend today. Its payout ratio sits at around 84% of earnings, so its dividend is sufficiently covered. It has raised its dividend for 49 consecutive years, and it has plans to keep growing its dividend by 4-6% annually going forward.  

A diversified utility stock with safer growth than Algonquin

If you want a combination of growth and income, Brookfield Infrastructure Partners (TSX:BIP.UN) is another stock to buy over Algonquin. Brookfield has a diversified business of utilities, transportation businesses, midstream/pipeline assets, and cell towers/data centres.

90% of its business have contracted earnings and over 85% are contractually hedged against inflation. The company has enjoyed solid 12% fund from operation per unit growth in 2022.

While BIP also has a fair amount of debt (net debt to EBITDA of 5.5), 90% is fixed at an average term to maturity of seven years. Its maturity profile is well spread out to manage interest rate risks.

Right now, it has $3 billion of excess liquidity. This provides ample balance sheet flexibility to be opportunistic in the current economic environment. Brookfield takes a contrarian approach when investing. It tends to make very accretive acquisitions when the economy turns sour.

Today, Brookfield pays a 4% dividend yield. It has a funds from operations payout ratio of 67%. It has grown its dividend for the past 13 consecutive years, and it just increased its dividend by 6% this year.

The bottom line

Fortis and Brookfield have significantly smaller dividend yields than Algonquin’s stock. However, their businesses and balance sheets are much better hedged against the effects of rising interest rates. These stocks have attractive profiles for modest earnings and dividend growth, and that’s what makes them attractive buys today.

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 Robin Brown has positions in Brookfield Infrastructure Partners. The Motley Fool recommends Brookfield Infrastructure Partners and Fortis. The Motley Fool has a disclosure policy.

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