What’s better than a high-yielding dividend stock?
A high-yielding dividend stock that outperforms the market!
While there’s no shortage of high-yield dividend stocks out there, not all of them are top performers. In many cases, high-yield stocks got their high yields by having their prices beaten down severely in the markets. That type of thing does not a quality stock make.
But when you have a quality stock that pays high dividends and also delivers steady capital gains, you have a recipe for a market beater. In this article, I explore one income-generating TSX stock that outperformed the TSX in the past and could easily do it again in the future.
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Fortis
Fortis (TSX:FTS) is a Canadian utility stock that is known for its high-ish yield, its dividend growth track record, and its superior total returns. The company’s stock has a 3.6% yield at today’s price. It increased its dividend every year for the last 52 years, making it a Dividend Mogul. Finally, the stock has outperformed the TSX over the last 10 years.
Over the last decade, Fortis’s total return (i.e., return with dividends re-invested) was 135%. The TSX’s return in the same period was 134.9%. So, Fortis managed to just slightly outperform the TSX over the period.
Will Fortis be able to repeat the feat going forward?
One thing is certain: the company will be able to increase the rates it charges customers. Fortis is currently doing a $26 billion five-year capital expenditure program that will take the company’s rate base from $41.9 billion to $57.9 billion. Over five years, the rate base will increase by 7% compound annual growth rate, and the company’s utility rates should follow suit.
Also, Fortis is a prudently managed company. It has a relatively modest debt-to-equity ratio and a dividend-payout ratio of around 70%. In the world of utilities, payout ratios far above 100% are quite common. So, Fortis is beating the class average.
The advantage of utilities
All regulated utilities have one big advantage that other companies don’t: stability.
This stability comes in two forms. First, there is the essential nature of utility services: people would rather cut out many expenses before going cold in the winter. This fact gives utilities some resilience in tough economic times. Second, regulated utilities often enjoy government-protected monopoly status, supported by regulations that make entering the industry as a newcomer nearly impossible. 98% of Fortis’s operations are regulated, so it enjoys this monopoly-like status.
Why Fortis beats the average for utilities
Above, I explained two advantages that regulated utilities have over other companies. These advantages are real, but still, not every utility is a great business. Fortis is unique in delivering strong, steady, and reliable positive returns. Why is this?
One reason is that Fortis manages its finances somewhat better than other utilities do. Its debt-to-equity ratio is low by utility standards, and its payout ratio is well below 100%.
Another reason is that Fortis invests more in growth than other utilities do. The company has bought out many other North American and Caribbean utilities over the years. Now, it’s growing its rate base by upgrading its infrastructure. This company grew in the past, and it should grow modestly in the future. For my money, Fortis is a buy.
