When it comes to stable dividend stocks, utility companies are often top choices for conservative investors. Among the top players in Canada’s utility sector are Fortis (TSX: FTS) and Emera (TSX: EMA), both of which provide essential services like electricity and natural gas distribution. How should you choose between the two? Let’s take a closer look to see which may be a better investment.
Source: Getty Images
Fortis
Fortis is one of Canada’s largest utility companies, with operations spanning across Canada, the United States, and the Caribbean. With a portfolio that includes essential services of electricity and natural gas transmission and distribution, Fortis provides services to 3.5 million customers. Its strong presence in North America positions it as a stable, well-diversified utility.
What attracts the blue-chip stock to investors is its consistent track record of dividend growth. The company has been increasing its dividend for half a century, making it one of the most reliable dividend payers on the Toronto Stock Exchange. This strong dividend history reflects the company’s ability to generate steady cash flow from its regulated utility operations.
Fortis is also focused on growth through acquisitions. Its expansion in the U.S., such as through its purchase of ITC Holdings, has added substantial scale and diversification to its operations. This strategy allows Fortis to benefit from a growing, stable customer base and increasing demand for energy.
However, the company’s growth strategy isn’t without its challenges. Fortis has a substantial amount of debt that’s typical in utilities that borrow to grow their business. While the company’s management has shown strong financial discipline, higher interest rates and debt servicing costs could potentially put pressure on its earnings. Still, the company’s ability to earn predictable revenue and earnings from regulated operations is the kind of stability that conservative investors like.
Emera
Emera is another major Canadian utility company that provides electricity and natural gas to its customers. The utility primarily operates in Canada and the United States. It’s also investing in renewable energy, which could be a growth driver.
Emera’s strategy is to expand its renewable energy portfolio while maintaining a strong regulatory framework. The company has committed to investing in cleaner energy solutions, including solar power, aligning itself with global shifts toward decarbonization. This focus on green energy could help Emera grow in the long term, particularly as governments and businesses push for more sustainable energy solutions.
Similar to Fortis, Emera is known for its dividend payouts, although its track record is shorter than Fortis’s. Emera stock has raised its dividend for about 18 consecutive years. However, Emera seems to be facing greater challenges than Fortis, as it has experienced slower growth, resulting in a higher payout ratio. Consequently, its recent dividend increase was also much lower than Fortis’s. Emera’s last dividend hike was 1% versus Fortis’s 4.2%.
The Foolish investor takeaway: Which is a better investment?
Both Fortis and Emera stock are fairly valued so they don’t offer much margin of safety today. Fortis stock offers a lower dividend yield of about 4.1% versus Emera stock’s 5.4%. However, Fortis has a longer track record of increasing dividends and has a more diversified business. Its dividend is also safer, with a sustainable payout ratio of about 73%. Therefore, investors interested in buying utility shares should look for a dip in Fortis stock for a potential investment.
