Utilities pay much more secure dividends than companies that operate in the volatile manufacturing or resources sectors.
The global COVID-19 pandemic has pushed some companies into bankruptcy. Survivors have eliminated or reduced their dividends. Among our Key stocks, AutoCanada Inc., BRP Inc., CAE Inc., Cenovus Energy, Dorel Industries, Gildan Activewear, Richelieu Hardware and The Walt Disney Company no longer pay dividends. Other Key stocks, such as AG Growth International and Ensign Energy Services, have reduced their dividends.
This is making it hard for investors to earn enough income without selling and depleting their capital. Meantime, safe 10-year Government of Canada bonds yield only 0.54 per cent. That’s behind the two per cent increase in the cost of living for 2020.
One way to raise your dividend income is to focus on buy-rated electric utilities stocks that we regularly review. Most of them pay above-average dividends. Those we rate ‘buys’ raise their dividends each year. And their dividends are relatively secure. After all, electricity is a necessity that most households and companies can’t do without.
Go for high, growing and safe dividends
Our buy-rated electric utilities pay dividends that currently yield between 3.5 and 6.8 per cent. You might worry that a yield of 6.8 per cent means that there’s too much risk in non-Key stock Capital Power Corp. But we continue to rate it a buy for long-term share price gains as well as high and growing dividends.
Our buy-rated utilities raise their dividends every year. That’s important in order to offset inflation. Inflation is an implacable enemy of retirees. It transfers wealth from the old to the young, who earn higher nominal salaries. Rising dividends also means that today’s dividends are relatively secure.
Another plus about Canadian electric utilities is that you benefit from the Canadian dividend tax credit. This shrinks the tax department’s bite. Earn the same amount from fully-taxed interest income, by contrast, and you’ll pay a much higher percentage to the tax department.
Another plus is that lower interest rates make electric utilities more profitable. That’s because they carry significant amounts of debt. They initially spend money building new facilities, yet those facilities contribute nothing to the earnings until they’re up and running. Lower interest rates cut their interest costs.
Our buy-rated Canadian electric utilities are Algonquin Power & Utilities Corp., Canadian Utilities, Capital Power Corp., Emera Inc., Fortis Inc., Hydro One Limited, Northland Power Inc. and TransAlta Renewables Inc.
This is an edited version of an article that was originally published for subscribers in the July 17, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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