Investing in the stock market to build a strong and reliable stream of passive income is one of the best strategies. While there are many sectors with high-quality dividend stocks to consider, there’s no question that one of the best dividend stocks in one of the best sectors for passive income is Emera (TSX: EMA), the utility stock.
Utilities like Emera have some of the most defensive and recession-resistant operations of any company on the TSX. Therefore, no matter what the state of the economy is, Emera can expect strong and consistent demand for its gas and electricity services.
Furthermore, because it constantly generates a tonne of cash flow and its operations are so defensive and regulated by the government, much of the revenue and earnings Emera generates are highly predictable.
This makes it an ideal passive income generator, and not just a stock to buy for an impressive yield, but one to hold for the long haul. Meanwhile, you can continue to expect annual dividend increases.
Why is Emera one of the best dividend stocks in Canada?
As I mentioned above, because Emera is such a reliable and defensive stock and its revenue and earnings are generally predictable, it’s one of the best dividend stocks you can buy.
And as it continues to invest in growth each year and improve its profitability, investors are rewarded with consistent annual dividend increases.
In fact, Emera has a current dividend growth streak of 17 straight years. Over the last five years, its dividend has increased at a compounded annual growth rate (CAGR) of 4.1%.
According to its recent history, Emera typically increases the dividend in the fall. So it’s unlikely we will see an increase to the dividend when it reports earnings on Monday, May 13th, next week.
However, its earnings will give investors a solid glimpse into how Emera has been performing lately and how it’s progressing according to its recent guidance.
According to that guidance, Emera’s current three-year $8.9 billion capital plan should help it grow its rate base at a 7% CAGR through 2026. In addition to its investment in future growth, though, investors will want to see progress on how Emera is improving its financial position.
It’s also worth noting that while annual dividend increases are still expected, in the near term, they could increase at a slower rate to bring down the payout ratio slightly and improve the reliability of the dividend. Analysts are currently predicting a 3.7% increase to the dividend this year, only slightly below its five-year average of 4.1%, bringing it to $2.89 per share annually.
Furthermore, the stock will likely see more dispositions of non-core assets in order to improve its balance sheets as well as its credit ratings. Therefore, while selling off assets isn’t usually ideal, it could help Emera’s stock become more appealing to investors and result in it being re-rated higher.
How cheap is Emera today?
As Emera continues to improve its financial position and as interest rates eventually start to decline, the stock certainly has significant upside potential.
After all, Emera’s valuation has trailed its number-one peer Fortis in recent years. For example, today, Fortis has a forward price-to-earnings (PE) ratio of 17.1 times, and over the last five years, its average forward P/E ratio was 19.2 times.
Emera, on the other hand, trades at 15.4 times its forward earnings today, and its five-year average forward P/E ratio is just 18.3 times.
So, it’s clear that both stocks are trading below their five-year averages, especially while interest rates are still high. Therefore, as interest rates fall and Emera continues to strengthen its core business along with its balance sheet, it could begin to see a strong rally.
Today, with the stock trading at roughly $48.20 at the time of writing, it trades just 10% off its 52-week low and nearly 20% below its 52-week high of $59.52.
So not only is Emera an excellent buy for passive income seekers with its current yield of roughly 6% today – and you can expect to continue to see consistent annual dividend increases – the utility also has a tonne of capital gains potential in the short term, making it one of the best dividend stocks to buy now.
