Dividend income is often thought of as being a fairly “safe” type of investment return. Unlike stock market gains, dividends are not exposed to daily price fluctuations or the capricious behaviour of market participants. This gives them the reputation of being reliable.
However, things are not always as they appear. Although dividend income tends to be fairly consistent over the short term, it can abruptly disappear. For example, the Canadian company Algonquin Power & Utilities reduced its dividend last year, resulting in lower-than-expected income. The stock also went down when the cut was announced.
So, dividend income isn’t always as reliable as it seems. Nevertheless, there are stocks out there that have been pretty consistent about paying, even raising, their dividends. In this article, I will explore one such stock that has raised its dividend payout for 49 consecutive years.
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Fortis
Fortis (TSX: FTS) is a Canadian utility stock that has operations in Canada, the U.S., and the Caribbean. It has 10 major utility operations, $64 billion in assets, and 3.4 million customers. It did $11 billion in revenue in fiscal 2022, which was an improvement over the previous year. Fortis has increased its dividend every year for the last 49 consecutive years. If it achieves another dividend hike this year, it will become a “Dividend King.”
Why it keeps raising its dividend
There are two reasons Fortis keeps raising its dividend:
- Management has an official policy of raising the dividend.
- Earnings growth has been good enough to support the dividend growth.
In the last 12 months, Fortis has grown its revenue by 15.68% and its earnings by 6.28%. The earnings growth rate is just enough to cover the 6% annual dividend increase planned. Over the last five years, earnings have grown at 5% CAGR (compounded annual growth). The long-term earnings-growth rate is a little behind the dividend-growth rate, although the payout ratio is fairly modest at 75%.
Will the dividend growth continue?
It’s one thing to note that Fortis’s historical dividend growth has been good, but quite another to say that it will continue into the future. Past returns don’t predict future returns, and the same is true for dividends.
With that being said, it looks like Fortis is in a good position to deliver another dividend hike this year should management choose to do so. The company’s earnings growth this year has been higher than the planned dividend increase. The revenue growth has been even stronger! On top of that, the payout ratio is far from the worst in the utility sector. So, Fortis appears likely to deliver a dividend hike when it releases earnings next month.
Foolish takeaway
On the whole, Fortis is a stable, well-run company whose dividend you can probably count on. Nothing is ever a sure thing; it’s for this reason that you should never put all of your money in one stock. You need to diversify. But having a Fortis position in your portfolio is probably a good idea if you want passive income.
