Stock market investments are regarded as risky and something retirees should avoid. This perception comes as shareholders are the ones who bear the profit as well as the loss of the business. But there are also some safe businesses that generate regular cash flows and do not face major shocks that could shake the foundation. Such stocks give safe income to their shareholders, who stay invested in them during the tough times.
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A stock that raised dividends for the past 51 years
Canadian Utilities (TSX:CU) is a stock that gives safe income and has even raised dividends for the past 51 years. It is a provider of electricity and natural gas distribution and transmission services that enjoys regular cash flows and seasonal stock price movement. When the temperature drops, household electricity and natural gas consumption increases.
Your electricity and gas bill converts into Canadian Utilities’s revenue. The utility distributes a significant portion of its cash flows as dividends. The company has high exposure to regulated services, wherein the regulator determines the base rate. With the growing usage of electricity, especially from the proliferation of electric vehicles and smart cities, large utility companies could see more revenue growth in future.
Canadian Utilities has already grown its dividend for the last 51 years and plans to maintain this growth for decades to come.
Should you be concerned about Canadian Utilities’s dividend?
One of the safest businesses to be in is utilities. Yet 2023 saw a mid-sized utility Algonquin Power & Utilities cut dividends, let go of its chief executive officer, and spin off its power business. This episode made investors skeptical about utility stocks and even made analysts question Canadian Utilities’s $9.5 billion long-term debt on its balance sheet.
Algonquin and Canadian Utilities are poles apart fundamentally. Unlike Algonquin, Canadian Utilities has its debt spread over the long term and has easy access to financing. CU has higher debt than equity, which makes its credit rating an important metric even for shareholders.
Fitch Ratings has an “A-“ credit rating for Canadian Utilities, which is higher than Enbridge’s “BBB-“ and Algonquin’s “BBB” rating.
Higher credit rating makes it easy for Canadian Utilities to access long-term funding. Last year, it issued 4.851%, 30-year debentures to repay existing debt and other general purposes. It gives you a fair idea that $9.5 billion debt is not a concern for this utility.
This stock is at its low
Canadian Utilities stock is trading below its pandemic low, as the stock price fell since May 2023. June and September are seasonally low for the utility, as electricity and natural gas demand falls during summer.
The company’s adjusted earnings fell 26% year over year to $100 million in the second quarter. This quarter was the bottom of the dip, because the 2022 base year saw a significant surge in energy prices. The impact of the 2022 inflation proved beneficial for Canadian Utilities. As inflation eased in 2023, the company’s high base rate reduced its earnings. This base rate impact will be seen in the third quarter before it normalizes in the fourth quarter.
Negative earnings growth, seasonal weakness, and overall bearishness in the utility sector pulled Canadian Utilities stock down 27.6%. This dip inflated its dividend yield to 6.3%, as the company maintained its annual dividend per share at $1.79.
How to lock in safe income
Now is an opportune time to lock in a $1.79 income on every $28.45 invested. If you buy 100 shares for $2,850, you can get $179 annually for another decade or two.
Canadian Utilities stock is range bound, $30-$40. One strategy is to accumulate the stock whenever it falls close to $30. That way, you can lock in a higher yield. More shares mean more dividends. And if you need a lump sum amount, you could consider selling some of the CU shares during its seasonal peak of January and early February.
