When it comes to dividend income, one of the top companies that comes to mind is Fortis (TSX: FTS). Fortis stock is now a Dividend King, increasing its dividend each year for the last 50 years.
But is that enough?
The concerns
While Fortis stock is generally considered a reliable dividend stock, there are a few reasons why some investors might be cautious about buying Fortis stock for dividend income. Utility stocks like Fortis are often sensitive to interest rate changes. Rising interest rates can lead to higher borrowing costs and potentially lower profitability for Fortis, impacting its ability to maintain or grow dividends.
As a utility company, Fortis is subject to regulatory decisions that can affect its revenue and profitability. Changes in regulations or adverse decisions by regulatory bodies can impact Fortis’s financial performance and its dividend payouts.
Some investors might be concerned about Fortis’s future growth prospects. If the company’s growth is seen as limited or slower compared to other dividend-paying stocks, investors may prefer stocks with higher growth potential.
Furthermore, Fortis has significant debt due to its capital-intensive operations. High debt levels can be a concern if they limit the company’s financial flexibility or if rising interest rates increase debt-servicing costs, potentially affecting dividend payments. And while it offers a dividend at a yield of 4.41%, it’s not the highest out there.
Consider a bank instead!
Instead of utilities offering lower returns and reasonable dividends, Canadian banks offer a strong growth opportunity — especially Bank of Nova Scotia (TSX: BNS), with a dividend yield of 6.87%! This high yield is particularly appealing in the current economic environment where stable income-generating investments are sought after by many investors.
BNS has a history of increasing its dividend payouts. Recently, the bank announced a 3% increase in its dividend, following an 11% hike in the fiscal first quarter (Q1) of 2022. This consistent growth signals confidence from the management in the bank’s financial stability and future earnings potential.
Despite facing economic headwinds, BNS remains profitable. In fiscal Q3 2023, the bank reported an adjusted net income of $2.2 billion and an improved common equity tier-one (CET1) ratio of 12.7%, indicating a solid capital cushion to weather difficult times.
Currently trading at roughly 10.5 times trailing 12-month earnings, BNS appears undervalued compared to its historical highs. This presents a potential buying opportunity for long-term investors, especially those looking for a blend of capital appreciation and dividend income.
Bottom line
Fortis stock has long been considered the top choice when it comes to dividend stocks. But unfortunately, that doesn’t mean you get returns along with it. Plus, dividends may come in at slower growth instead.
While BNS faces challenges such as potential economic downturns and slowing mortgage growth, its high dividend yield, consistent dividend growth, strong financial metrics, and attractive valuation make it a compelling choice for dividend-focused portfolios. Investors looking for a steady income and potential long-term gains might find BNS a valuable addition to their investment strategy.
