Last year, Fortis (TSX:FTS) paid out $768 million in dividends to its shareholders. This year, the payment will be about $796 million. In fact, the utility stock has one of the longest dividend-growth streaks on the Toronto Stock Exchange. It has paid an increasing dividend to common shareholders for 50 consecutive years.
From the shareholders’ perspective, how much dividend income they receive this year depends on how many shares they own. If you hold 100 Fortis common shares, you would receive $2.36 per share, or $236 in dividend income, this year based on the current quarterly dividend of $0.59 per share. Based on the usual dividend hike schedule, though, we would expect a dividend increase in September. Assuming a 4% increase, 100 shares would pay out a total of about $238 in dividend income this year.
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Fortis supports safe and growing dividends
Investors, many of whom are retired or are focused on income, trust Fortis to provide safe and growing dividend income. Indeed, the top utility stock is diversified across 10 regulated utility operations in Canada, the United States, and the Caribbean. Importantly, it provides essential services from approximately 93% of its assets that transmit or distribute electricity or natural gas, serving 3.5 million customers no matter if the economy is good or bad.
For example, Fortis owns ITC Holdings, the largest independent electricity transmission company in the United States. This subsidiary opens up unique transmission investment opportunities in the United States. The transmission operator in the U.S. Midwest region, the Midcontinent Independent System Operator (MISO), identified US$17-23 billion of transmission investments within ITC’s footprint in the second tranche of MISO’s long-range transmission plan. ITC should receive a nice slice of this investment opportunity. Investors can look forward to the MISO board approval in the second half of 2024.
Fortis expects its 2024 rate base to be $38.4 billion. Management further projects its capital plan to grow the rate base to $49.4 billion by 2028.
In the last decade, Fortis increased its adjusted earnings per share by north of 6% per year, which drove similar dividend growth. Based on its growth plans, management anticipates to grow its dividend safely by 4-6% per year through 2028. Its payout ratio is estimated to be sustainable at about 74% of adjusted earnings this year.
Investor takeaway
An investment in Fortis stock today at about $54 per share starts investors with a dividend yield of 4.3%. It’s a good buy for conservative investors, especially on meaningful market corrections. Over the next few years, investors can expect dividend growth of at least 4%.
Assuming a fairly valued stock, it leads to approximated long-term total returns of approximately 8% per year. On digging deeper, the blue-chip stock actually trades at a 10% discount from its long-term normal price-to-earnings ratio. So, through 2028, it could potentially deliver total returns of almost 12% per year. Additionally, it’s not bad timing to buy Fortis given that it has traded at about the midpoint of its trading range since 2022.
