After a strong performance last month, the S&P/TSX Composite Index started this month on a weak note, losing 1.3% yesterday. Concerns over weakening economic activities, with the manufacturing data in the United States showing contraction for the fifth consecutive month, have made investors nervous, leading to a pullback. With volatile equity markets, investors should look to buy quality dividend stocks to strengthen their portfolios and earn a stress-free passive income. Meanwhile, here are my three top picks.
Fortis
Fortis (TSX: FTS) operates a highly regulated utility business, serving 3.5 million customers. With around 99% of its assets regulated, its financials are less susceptible to market fluctuations, generating stable and predictable financials. The company has delivered an average total shareholder return of 9% over the last 10 years. Besides, the company has rewarded its shareholders by raising its dividends for the previous 50 years, with its forward yield currently at 3.9%.
Further, Fortis has planned to invest around $25 billion from 2024 to 2028, growing its asset base at an annualized rate of 6.3%. The company plans to generate around 55% of these investments from its operations and 11% from its debt. So, these investments won’t substantially raise its debt levels. Along with these growth initiatives, tariff hikes and improving operating efficiencies could boost its financials in the coming years. Amid these growth initiatives, Fortis’s management plans to raise its dividend by 4-6% annually through 2028. Besides, its valuation looks reasonable, with the company trading at 1.4 times its book value.
Hydro One
Hydro One (TSX: H) transmits and distributes electricity to 1.5 million customers. With around 99% of its business fully rate-regulated and no exposure to commodity price fluctuations, its cash flows are stable and growing steadily. Besides, the company has adopted several cost-cutting initiatives, such as outsourcing some of its activities and adopting strategic sourcing initiatives, which led to $113.9 million of productivity savings in 2023.
The electric utility company plans to invest around $11.8 billion from 2022 to 2027, expanding its rate base at an annualized rate of 6%. Amid these growth and cost-cutting initiatives, the company’s management projects its EPS (earnings per share) to grow at an annualized rate of 5-7%. Besides, it has a solid balance sheet, with its liquidity at $3.9 billion as of June 30. Given its stable cash flows, healthy growth prospects, and solid financial position, I believe its future dividend payouts will be safer.
Meanwhile, Hydro One has raised its dividends at an annualized rate of 5% from 2017 to 2022. It currently pays a quarterly dividend of $0.3142/share, with its forward yield at 2.7%. Further, its management is confident of increasing its dividends at an annualized rate of 6% through 2027, thus making it an enticing buy.
Enbridge
My final pick would be Enbridge (TSX: ENB), which has been paying dividends for the previous 69 years and raised its dividends at an annualized rate of 10% for the last 29 years. The midstream energy company earns around 98% of its cash flows from regulated cost-of-service or long-term take-or-pay contracts, delivering high visibility over its cash flows and consistently raising its dividends. Meanwhile, it currently offers a healthy forward dividend yield of 6.7%.
Moreover, Enbridge has expanded its footprint in the natural gas utility space by acquiring two assets in the United States. Besides, it is also working on acquiring the third facility from Dominion Energy, which the company expects to complete this quarter. These acquisitions could further strengthen its cash flows and lower its business risks. Further, it is continuing with its $24 secured capital program, investing $6-$7 billion annually. Amid these growth initiatives, I believe Enbridge is well-equipped to continue its dividend growth, making it an excellent buy for income-seeking investors.
