How much passive income would you get by investing in the TSX index?
It depends on how much you invest. Assuming you invest $543,000 — the average net worth of a Canadian retiree over the age of 65 — you get $16,072 per year. That is, $543,000 multiplied by 2.96% — the dividend yield on a typical TSX index fund.
It’s not an insignificant amount of money, but you can do better. If you invest in higher-than-average yielding dividend stocks, you can get $24,000 per year with $543,000 invested. Technically, you can get as much as $81,450 per year with such investments. That’s the dividend income generated by investing $543,000 at a 15% yield — typical of the highest-yielding junk bond funds. However, such funds are extremely risky. 4-5% is the highest portfolio yield you can get when investing in a portfolio of “sensible” Canadian stocks. In this article, I will explore one stock that can make that happen.
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Fortis
Fortis (TSX:FTS) is a Canadian utility stock that has performed very well over the years. It has raised its dividend every single year for the last 50 years, making it one of Canada’s few “Dividend Kings.” It has also delivered an 11.8% total return over the last five years, better than both the TSX index and the TSX utilities sub-index.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Fortis | $53.60 | 10,123 | $0.59 ($2.36 per year) | $5,972 ($23,890 per year) | Quarterly |
Fortis stock: What has produced the superior returns?
It’s one thing to note that Fortis has done well historically, but quite another thing to say that it will keep performing well. In order to know that, we need to look at the business itself. By understanding what Fortis actually does, we can gauge how well it is likely to perform in the future. So, let’s take a look at Fortis’s underlying business.
Fortis’s long-term performance has been a function of two factors:
- Advantages enjoyed by regulated utilities as a whole.
- Fortis’s emphasis on growth is relatively unique among Canadian utilities.
First, let’s discuss the advantages that utilities as a whole enjoy. Utilities are subject to many regulations that make it very hard for new competitors to enter the industry. In some cities, the local utility is a government-approved monopoly. This fact, combined with the fact that utility services are basic life necessities, typically leads to high revenue stability at utilities. The highly stable revenue does not always lead to growing earnings: many utilities’ earnings have declined. However, Fortis’s earnings are up with an 8.5% compound annual growth rate (CAGR) on a whole-company basis and 6% CAGR on a per-share basis, over the last five years.
The reason for Fortis’s growth — which is not “high” but is above average for its sector — is that the company has expanded considerably over the years. Starting as a small utility known as “Newfoundland Power,” it later expanded by buying out several Canadian, U.S., and Caribbean utilities. As a result of these expansions, the company’s earnings increased.
Today, the company is doing a massive series of capital expenditures that will increase its rate base. This isn’t as ambitious as Fortis’s past expansions, but it should have some effect. At any rate, this project combined with Fortis’s ability to gradually raise rates over time, should fuel more dividend hikes. This makes the stock a good one to hold inside a diversified high-dividend portfolio.
