The Dividend Kings: Stocks Every Canadian Investor Should Own

Fortis Inc (TSX:FTS) is a true dividend King.

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“Dividend King” is among the most prestigious titles a stock can hold. Having raised their dividends for 50 consecutive years, these “Kings” are truly noble. Many stocks have paid dividends for 50 or more years, but few have raised them for 50 in a row. The Dividend Kings are the ones that have. In this article, I will explore two Canadian Dividend Kings that every Canadian investor should own.

Fortis

Fortis Inc (TSX:FTS) is perhaps Canada’s best-known Dividend King. It acquired its title last year, when it notched its 50th consecutive year of dividend increases. Fortis had a kingly reputation among dividend investors long before it became a literal King. With its 50 uninterrupted years of dividend hikes, it has earned its place in the Pantheon.

Fortis’ management is aiming for 5% to 6% annual dividend increases through to the end of 2028. Even without future dividend growth, Fortis has a lot of income potential. The shares yield 4.4% today. If the company comes through with the planned dividend hikes, then the yield-on-cost for shareholders buying today will rise. Either way, the yield as it stands now is satisfactory and pretty well covered, with a modest 74% payout ratio.

How has Fortis managed to do all this dividend growth?

It comes down to two factors: one, advantages enjoyed by utilities as a class; two, Fortis’ unique emphasis on growth.

Utilities as a class enjoy very high revenue stability. They’re the companies that supply heat, light, and sometimes water to homes. Ask yourself, when was the last time you cancelled your electrical bill? My guess is the answer is likely “never.” Utility bills are intimately tied to homes – the bills come in each and every month and aren’t easy to cancel. People do have the option of cutting back on energy consumption if it gets too costly, but most would rather sell their cars than go cold in the Winter. These advantages result in stable revenue for utilities as a class. Fortis has done even better than most utilities, having invested significantly in growth over its history. As a result, it has outperformed the TSX utilities sub-index.

Canadian Utilities

Canadian Utilities (TSX:CU) is another Canadian utility stock and dividend King. CU has an even higher yield than Fortis: 60%. On the flipside, its payout ratio is somewhat higher than Fortis’ (it is 80%), which isn’t a good thing. The company has compounded its revenue and earnings at negative rates over the last five years. Its net income margin (17.5%) is good, as is its return on equity (10.7%). Canadian Utilities certainly doesn’t have Fortis’ stellar growth and acquisitions track record, but it’s a stable company paying out 6%. It should perform reasonably well over the long term.

Dividend King stocks: Foolish takeaway

There aren’t very many Dividend King stocks out there. On the TSX, there are only two that I’m aware of. That’s not surprising: it’s hard to achieve 50 consecutive dividend hikes when the economy goes through so many peaks and troughs. So, Fortis and Canadian Utilities are both very special companies.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.

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