Do you want to earn $2,000 per year in passive income? That’s enough money to cover a few minor expenses (let’s say, your cell phone bill and a few streaming services), and it can be had with surprisingly little invested up-front. By investing $46,511 at an only slightly above average yield. In this article, I will explore one TSX stock that can make that possible.
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Fortis
Fortis Inc (TSX:FTS) is a Canadian utility, generally considered among the best of its kind in the country. With its 50 consecutive years of dividend increases, it is a Dividend King. That is a rare distinction enjoyed by only a tiny handful of stocks – it is a notch above the much-coveted “Dividend Aristocrat” title, which requires 25 years of hikes. With a 4.3% yield, it takes $46,511 invested in FTS to earn $2,000 per year in passive income.
The way Fortis achieved this growth was pretty remarkable. It invested in growth, all while paying dividends, and keeping debt within reason. The company has a 1.4 debt-to-equity ratio, which is fairly low for a utility. It has never had a dividend payout ratio above 80%, which is also remarkable for a utility, as a lot of them have ultra-high payout ratios. The combination of a sensible dividend policy and steady long-term investments resulted in Fortis having a great dividend track record and strong balance sheet. The downside is that the company has diluted its equity quite a bit, having roughly doubled its share count over the last 10 years.
Company history
Fortis has a long and storied history. It was founded in 1937 as the Newfoundland Light and Power Co, a utility company serving the province (then country) of Newfoundland. FTS stock was listed in 1949, when Newfoundland joined the confederation. It used its new position as a public company to start buying up utilities across Canada. In 1987, it turned into a holding company named Fortis. In subsequent decades, Fortis bought up utilities in Canada, the U.S., and South America. Today it’s one of the biggest utilities in Canada.
A strong balance sheet
One very appealing characteristic of Fortis – especially compared to other utilities – is its fairly strong balance sheet. Among other positive characteristics, it boasts:
- A 1.4 debt/equity ratio (not low, but modest for a utility).
- A 0.6 current ratio (not high, but a reasonable level).
- A 3.1 interest coverage ratio (going by 2021 interest levels, interest income was actually a gain rather than a cost in the trailing 12-month period).
Fortis’ interest coverage is excellent, and the other two metrics are basically serviceable. That’s a big achievement, because debt can sometimes be a massive problem for utilities.
50 consecutive years of dividend increases
Last but not least, we have Fortis’ dividend growth streak. As mentioned, the company has grown its dividend for 50 consecutive years. In the last five years, the dividend increases have been 5% to 6% per year. The company is aiming to raise the payout by 6% per year through 2028. So, investors buying today may enjoy even higher yields in the future, if history is any indication.
