When it comes to finding high-quality and reliable dividend stocks with consistent growth potential year in and year out, there’s no question that a top-notch utility stock like Emera (TSX: EMA) is a great choice to consider.
Utility stocks like Emera are well-known amongst investors and are some of the most stable and predictable companies you can own.
First off, because they provide essential services such as electricity and gas, they are incredibly defensive. So even when the economy is slowing down, or even in outright recessions, utility stocks like Emera hardly see any impact on the demand for their services.
In addition, though, the utility industry is regulated by the governments in each jurisdiction in which these companies operate. That makes their future revenue, cash flow, and earnings highly predictable and allows stocks like Emera to consistently invest in expanding their operations.
Utility stocks will never offer massive growth potential overnight like a tech stock might, but they provide steady and reliable growth. More importantly, they can help protect your capital should the market sell-off.
Finally, in addition to their incredibly defensive business model, many utility stocks, including Emera, have widely diversified operations. This way, by operating in different regions, it helps to mitigate even more risk, which is why these are some of the most reliable stocks you can buy on the TSX.
However, even with an incredibly reliable business, there are always risks, and while Emera’s dividend is certainly incredibly safe, here’s why you may want to consider a different utility stock, like Fortis (TSX: FTS), instead.
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Is Fortis a better utility stock to buy than Emera?
Both Fortis and Emera have highly similar businesses; both are utility stocks that provide electricity and gas to their customers, and both are multibillion-dollar companies with operations diversified all over North America.
Besides those similarities, initially, Emera may seem like the more appealing stock. For example, right now at the time of writing, Emera stock offers a dividend yield of 4.4% compared to Fortis, which offers a current dividend yield of 3.5%.
That’s a significant difference in yield, especially for dividend investors looking to boost their passive income as much as possible.
And while Emera is still incredibly safe and reliable, Fortis stock takes it one step safer.
For example, looking at the normalized earnings per share (EPS) each stock generated in 2024, Fortis had a payout ratio of just 73%. Emera, on the other hand, paid out roughly 98%.
That’s a massive difference, and while a payout ratio nearing 100% isn’t that concerning for a utility stock like Emera with highly predictable future revenue and cash flow, it’s clear how much safer Fortis is.
A lower payout ratio gives Fortis flexibility
The fact that Fortis has a much lower payout ratio than Emera stock certainly makes it one of the most reliable businesses you can invest in today, but it’s not the only reason why Fortis might be the better long-term investment.
As I mentioned, even with a payout ratio just under 100%, Emera is still a stock you can rely on. So, if this really just comes down to risk and dependability, the higher yield alone can still make Emera worth owning.
However, Fortis’s lower payout ratio also allows it to increase the dividend at a much more significant pace. So, although the stock offers a lower yield right now, investors have more dividend growth potential from Fortis, at least in the near term.
For example, currently Fortis is targeting annual dividend growth of 4% to 6% over the next few years. Emera stock, on the other hand, is targeting a more modest 1% to 2% annual dividend growth, as it works to lower its payout ratio.
So, although Emera is still an incredibly reliable dividend stock and offers an attractive yield of roughly 4.4%, if you’re looking for the safest stock possible or prefer more dividend growth potential, Fortis is probably the better choice today.
