Are you looking for steady, dependable dividend income that’s regularly paid to your RRSP or TFSA?
If so, utility stocks are among the best assets for you to consider.
Utilities tend to be very stable businesses, because they are heavily protected by the government, ensuring minimal competition. On top of that, they provide essential services (heat, light, water, etc), which means that people will always pay for what they have to offer. Combine these two factors (government protection and essential services) and you’ve got the recipe for a very safe yet lucrative investment.
Of course, the mere fact that a company is a utility doesn’t mean it’s guaranteed to provide a great return. As we saw with Algonquin Power & Utilities Corp’s third quarter 2022 earnings release, utilities can and do drop the ball. Nevertheless, utilities have some built-in advantages that make them among the most reliable assets in the world of common stocks. In this article, I will explore two Canadian utility stocks that may be worth a look.
Fortis Inc (TSX:FTS) is a Newfoundland-based utility that has delivered some of the best long-term returns of all large Canadian utilities. It started off as the Newfoundland Light and Power Company. In 1987, it transformed into a holding company and began acquiring utilities in Western Canada. Later, it expanded to markets even farther afield, such as the U.S. and the Caribbean. Today, the renewables, electric, and gas utility does over $9 billion in annual revenue.
Over the last five years, Fortis stock has outperformed both the TSX and TSX utilities sub-index. In fact, with a total return of 11.8% CAGR per year, it has even outperformed the mighty S&P 500!
What enables Fortis to deliver these superior returns?
Apart from the built-in advantages that all utilities enjoy, Fortis also invests in growth. Its expansion across the Americas from 1987 to today is proof enough of that. Today, the company is carrying out a $25 billion capital expenditure plan that it says will increase its rate base (i.e., the amount of customer assets from which it can collect fees). Also, although Fortis invests in growth, it has never allowed its payout ratio (dividend divided by earnings) to stray above 70%. The end result has been a dividend investment that has delivered considerable growth.
Emera Inc (TSX:EMA) is another Canadian utility based on the East Coast. Emera is Nova Scotia’s largest utility and an operator of utilities across Canada and the United States. The company’s stock has a 5.93% dividend yield – higher than Fortis’. Despite its high yield, Emera has a not-ridiculous payout ratio of 83%.
Emera stock scores well on growth. In the trailing 12-month period, its revenue grew 25% and earnings per share (“EPS”) 118%. The long-term growth has been pretty good, too. Over the last five years, EMA has grown at the following compounded annual rates:
- Revenue: 5.6%.
- Operating income: 11.5%.
- Net income: 40%.
- Earnings per share (EPS): 39.9%.
For a utility, this is truly spectacular growth. And Emera has been able to achieve it while paying dividends. An impressive feat, no doubt about it.