The heat wave that hit certain parts of North America like British Columbia, Seattle, Portland, and New York highlights how essential utilities are.
Apparently, when utility infrastructures are built, extreme weather is not accounted for, which is why cities like New York warned citizens to conserve power. They asked citizens to avoid using major appliances and limit electricity usage to reduce the risk of a wide-area power outage.
Hundreds of lives have been lost because of this heat wave. The demographics that are most at risk include seniors, children, and pregnant women.
In any case, if you’re affected by the heat wave, make sure to stay hydrated and cool. Consider going to the mall to enjoy air conditioning in the hottest hours and stay under the shade when you’re outside.
Utilities are essential no matter if the economy is doing well or badly. People need to use electricity, gas, and water no matter what. So, utilities are one must-have dividend stock in your income portfolio. Specifically, you want utilities that are large enough to make stable earnings year in year out and pay sustainable dividends.
Here are some of the dividend-paying utility stocks that I own in my income portfolio: Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN), Fortis (TSX:FTS)(NYSE:FTS), and Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP).
Fortis is a reliable dividend stock with 47 consecutive years of dividend increases to prove it. Its 10-year dividend growth rate is 5.6%.
The utility generates annualized revenues of CAD$9 billion and net income of about CAD$1.3 billion. It is a regulated electricity and gas utility with 93% of its assets in distribution and transmission. These are what make its earnings so defensive and its dividends so dependable.
Its payout ratio is estimated to be about 75% this year. And investors can expect a dividend hike of approximately 6% very soon in September. Therefore, it yields roughly 3.7% now but the forward yield is 3.9%. It has a visible growth plan to support an average annual dividend growth rate of 6% through 2025.
There’s little uncertainty in the business. So, you could buy and hold the dividend stock particularly if you bought shares for an initial yield of 4% or higher.
FTS Dividend Yield data by YCharts
Fortis stock’s 10-year yield history indicates it’s a good buy at a +4% yield. The strategy of using the yield to determine when to buy a dividend stock works very well for businesses like Fortis that have high predictability.
My largest utility stock
Brookfield Infrastructure generates annualized revenues of US$9 billion and adjusted EBITDA, a cash flow proxy, of about US$2.3 billion.
BIP is my largest utility stock holding, making up 6% of my stock portfolio. Its business is so diverse that I wouldn’t mind if it were 10% of my portfolio. It owns, operates, and invests in utilities, midstream, transport, and data infrastructure assets globally.
Source: BIP Investor Fact Sheet
What’s crucial is that it has sustainably increased its cash distribution since its inception. It has increased its dividend at a lower rate than its funds from operations (FFO) growth.
Source: BIP Investor Fact Sheet
Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM), its general partner and manager, has strong operational expertise. And it has about 30% equity interest in Brookfield Infrastructure. So, management’s interests are well aligned with those of shareholders’.
BIP targets an FFO payout ratio of 60-70%, which leaves sufficient cash flow for maintenance and reinvestment into the business for growth. Additionally, it’ll have room to grow its cash distribution by 5-9% a year.
We added to the dividend stock in March 2020 during the pandemic market crash. It was simply one of those stocks that didn’t require much thinking, on our part, to buy more because we have always had high conviction and confidence in the business.
The stock fell 52% from peak to trough during the pandemic crash. However, the low of US$25 per unit only happened in a flash. Many investors would have missed it.
But it does not matter.
What matters is that dividend investors bought at a low. Personally, we managed to pick up shares in the US$33-36 range, locking in an initial yield as high as 6.5%! These shares spun off BIPC shares and appreciated +60%. The price appreciation is nice and the growing dividend income stream is invaluable!
We think large-cap utility stocks that pay sustainably growing dividends are must-own stocks in income portfolios. What is your favourite utility stock?
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Disclosure: As of writing, we own shares of AQN, FTS, BIP, BIPC, and BAM.Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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