Dividend investing is one of the best strategies Canadians can use to create a passive-income stream. When using this strategy, investors should look beyond high-yielding dividends. To ensure a successful passive-income stream in your self-directed portfolio, you must identify dividend stocks with reliable track records and fundamentally strong underlying businesses that can fund growing dividends.
The top Canadian utility stocks have become mainstays in many income-generating investment portfolios. To this end, Canadian Utilities (TSX: CU) is a top choice for many investors. The Canadian Dividend Aristocrat has increased its payouts over the last 50 years without fail. Due to the necessary nature of their services, these companies generate stable cash flows even during volatile market conditions.
The stocks of utility companies have gained a reputation for being excellent alternatives to fixed-income assets like Guaranteed Investment Certificates due to reliable returns from shareholder dividends that also keep pace with inflation. However, utility stocks are also infamous for failing to deliver much in terms of capital appreciation.
Amid the volatility in the past couple of years, CU stock share prices have dropped. Today, I will explore why it is happening to determine whether it can be a good holding to consider.
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Canadian Utilities
As of this writing, Canadian Utilities stock trades for $30.85 per share, down by 22.62% from its 52-week high. At these levels, it boasts an inflated 5.87% dividend yield. While the higher dividend yield makes it an attractive stock to buy, investors should consider the reasons for its dragging share prices.
Canadian Utilities stock and its peers generate stable cash flows with virtually guaranteed income through essential services. Regardless of economic concerns, its customers will never cut their utilities when removing expenses to save costs.
Despite guaranteed cash flows, utility companies suffered greatly due to higher interest rates. Amid inflationary concerns, central banks in the U.S. and Canada raised key interest rates.
Utility companies rely on heavy debt loads to fund operations and capital programs. With borrowing costs higher, Canadian Utilities saw its margins decrease significantly.
Besides the more recent macroeconomic factors, CU stock’s sluggish performance in the longer run can be attributed to slow earnings growth. The added economic crunch from rising interest rates changed its share price movement from flat to lower.
However, the company’s profitability stands as a positive factor for interested investors.
Foolish takeaway
In the last 12 months, CU stock had a 67% gross profit margin, a 17% net margin, and an 11.3% return on equity. These ratios imply that CU is a profitable company. With key interest rates expected to go down this year, the company’s profitability is likely to improve. Generating recurring income through long-term contracts, its debt might be the only factor weighing its financials.
With no growth drivers and interest costs weighing the stock down, Canadian Utilities stock might not offer much in terms of capital appreciation. However, Canadian Utilities will likely remain a solid play for income-seeking investors for years to come.
