Utility stocks have taken a hit in the past 12 months, as the sharp rise in interest rates has driven up borrowing costs for these companies that use debt as part of their funding program for growth projects. Rising interest rates have also made fixed-income alternatives, like Guaranteed Investment Certificates (GICs), more attractive for investors.
Contrarian investors with an eye on dividend growth and total returns are wondering which utility stocks might now be undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
Fortis
Fortis (TSX:FTS) has $65 billion in utility assets located across Canada, the United States, and the Caribbean. Electricity transmission and natural gas distribution operations make up 93% of the asset base. A full 99% of overall revenue comes from rate-regulated businesses.
This is important for investors to consider when looking for a reliable dividend stock. Fortis has a revenue stream that is predictable, which enables management to plan out long-term growth initiatives while giving investors good guidance on dividend increases.
Fortis is working on a $22.3 billion capital program that will raise the rate base by a compound average of 6% per year over five years. The resulting boost to cash flow should support planned annual dividend increases of 4-6% through 2027. Fortis bumped up the dividend in each of the past 49 years.
FTS stock trades near $55.50 at the time of writing compared to the 2022 high above $64.
Investors can take advantage of the latest pullback to buy Fortis shares at a good price and secure a 4% dividend yield. This is below the rate you get on a GIC today, but the dividend growth will steadily improve the return on the initial investment, and FTS stock should drift higher over the long run.
Emera
Emera (TSX:EMA) is a Canadian utility company with $40 billion in assets spanning electricity generation, transmission, and distribution and natural gas transmission and distribution businesses primarily located in Canada and the United States. It also has operations in three Caribbean countries. In total, Emera serves 2.5 million customers.
Adjusted net income in the first quarter (Q1) of 2023 came in at $268 million, up from $242 million in the same period last year. The Q2 results should be solid as well. The company is spending $3 billion on capital projects in 2023 as part of a three-year capital program that will see Emera invest $8-$9 billion on growth projects.
The rate base is expected to increase by 7-8% over this timeframe. That should support steady annual dividend increases in the 4% range through 2025.
EMA stock trades below $53 per share at the time of writing compared to more than $64 in April last year. The pullback is probably overdone, and investors can now get a solid 5.25% dividend yield.
The bottom line on top TSX dividend stocks
Fortis and Emera pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA or RRSP, these stocks look cheap today and deserve to be on your radar.
