Although Canadian utilities make up only about 3% of the Canadian stock market (using iShares S&P/TSX 60 Index ETF as a proxy), they make up a good portion of many Canadian investors’ diversified portfolios. That’s because top utility stocks typically pay decent dividend income and increase their dividends over time.
Here are some of the constituents in iShares S&P/TSX Capped Utilities Index ETF: Fortis (TSX:FTS), Brookfield Infrastructure Partners (TSX:BIP.UN), AltaGas (TSX:ALA), and Canadian Utilities (TSX:CU). The four utilities paid out close to $3.7 billion in dividends last year. As they tend to increase their dividends over time, investors can expect a bigger payment this year.
10-year Total Return Level data by >YCharts
Fortis stock
The Canadian utility exchange-traded fund (ETF) has the largest weight of almost 22% in Fortis. The regulated utility, which is diversified across 10 operations in Canada, the United States, and the Caribbean, has increased its dividend for 50 consecutive years. Income, retired, and passive investors love this consistency. Currently, it has a multi-year capital plan to support dividend growth of 4-6% per year through 2028.
At $55.88 per share at writing, the fairly valued stock offers a dividend yield of 4.2%. Its last dividend hike was 4.4% in September. So, investors can expect another dividend hike of at least 4% in the coming September. Assuming a 4% hike, that would be a forward yield of almost 4.4%.
Brookfield Infrastructure
Brookfield Infrastructure Partners L.P. is XUT’s second-largest constituent with a weight of north of 15%. BIP owns and operates a global, quality portfolio of utility, transport, midstream, and data infrastructure assets. It has a proven track record of execution that has supported a growing cash distribution every year since it was spun off from its parent company.
BIP’s 15-year dividend-growth rate is 10.3%, which is above average for the utility sector. Going forward, it believes it can achieve funds from operations growth of north of 10% (with 6-9% of organic growth) that can support healthy cash distribution growth of 5-9% per year. At $41.29 per unit, the undervalued stock offers a yield of about 5.4%, which is attractive.
AltaGas
AltaGas is XUT’s fifth-largest holding, with a weight of over 7%. It owns a good mixture of utility (55% of portfolio) and midstream (45%) assets. Importantly, in its utility portfolio, it has regulated natural gas distribution assets with a rate base of US$5.1 billion that make stable earnings. The company has turned around nicely since the 2020 pandemic year. From October 2020, after the stock stabilized, it has returned about 23% per year, doubling investors’ money in the period.
AltaGas’s three-year dividend-growth rate is north of 5% per year. At $30.76 per share at writing, the reasonably valued stock offers a dividend yield of under 3.9% and should have no problem hiking its dividend over the next few years. In fact, its growth profile looks better than most of its peers, likely thanks to its portfolio mix.
Canadian Utilities
Canadian Utilities is the 10th-largest holding in XUT. It has the longest dividend-growth streak among Canadian stocks. However, because of a lack of persistent growth, the stock has been trading in a sideways range since 2015. Its recent dividend growth has also slowed to 1%, which is below the industry average. That said, the stock is trading at the low end of its multi-year trading range. So, it could be a good buy for a trade, as investors get paid a nice dividend for the wait. At $31.92 per share at writing, it offers a dividend yield of almost 5.7%.
