Income investors have spent the last few years getting spoiled. Cash, Guaranteed Investment Certificates (GICs), and bonds suddenly paid enough that buying a dividend stock for a 4% yield could feel like doing extra homework for roughly the same allowance.
That calculation starts changing once interest rates head lower. The Bank of Canada has already brought its policy rate well below where it sat a year ago. If borrowing costs continue falling, GICs and other fixed-income investments will eventually renew at less attractive rates. Suddenly, a dividend stock offering more than 4% today, with the potential to increase that payout over time, starts looking considerably more interesting.
There’s another reason I’d pay attention now. Falling rates don’t simply make dividend yields look better by comparison. They can improve the economics of the businesses paying those dividends, particularly companies that borrow heavily to build long-lived assets. And utilities are a perfect example.
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Why utilities work
Utilities spend billions building power plants, transmission lines, natural-gas infrastructure, and other assets that can generate regulated returns for decades. That creates wonderfully predictable revenue, but somebody has to pay for all that construction upfront.
Cheaper borrowing can therefore take some pressure off financing costs while making future investment more economical. At the same time, lower bond and GIC yields can push income-seeking investors back toward utility stocks. That’s a pretty useful one-two punch.
Of course, I wouldn’t buy a utility simply because rates might fall. I’d still want growing earnings, visible investment opportunities, and a dividend supported by the underlying business. That brings me to Emera (TSX: EMA).
EMA
Emera stock owns regulated electric and natural-gas utilities, with major operations in Florida as well as Atlantic Canada and the Caribbean. It isn’t the sort of business that needs consumers to suddenly feel flush. People tend to keep turning on their lights whether the economy is booming or limping along. That dependable demand gives Emera a strong foundation, while its growth plan gives investors something more interesting than a dividend that simply sits there.
The company has roughly $20 billion of planned capital spending through 2030. Management expects those investments to help drive annual rate-base growth of around 7% to 8%, which should feed into adjusted earnings per share (EPS) growth averaging between 5% and 7% through 2030.
Emera stock has also completed the sale of New Mexico Gas Company, giving it additional flexibility to reduce debt and focus capital on its remaining utilities. With such a large investment program ahead, strengthening the balance sheet certainly isn’t a bad use of the cash.
Paid to wait
Emera currently pays a quarterly dividend of $0.7325 per share, or $2.93 annually. At a recent share price near $71, that works out to a yield of roughly 4.1%. Sure, not the biggest. Yet there’s a big difference between grabbing the largest yield available and owning a company capable of supporting its payout while growing the business underneath it. Emera stock has increased its dividend gradually over the years, and future earnings growth could provide room for that income stream to keep expanding.
Investors also get paid while waiting to see whether lower rates provide another boost. If GIC rates continue dropping, a 4.1% utility yield could suddenly look far more competitive. More investors reaching the same conclusion could support Emera stock’s share price, meaning waiting for the rate-cut story to become obvious might also mean paying more for the stock.
Bottom line
Investors can currently collect a roughly 4.1% yield from an essential-services business planning billions in regulated infrastructure investment. If rates continue falling, financing pressure could ease just as income investors start hunting for alternatives to shrinking GIC yields. By the time everyone decides utility dividends look attractive again, the easier buying opportunity may already be gone.
