Electric utilities can outperform bonds

Electric utilities have slipped. Even so, we expect them to outperform bonds in the long run. For one thing, most raise their dividends every year. For another, Canadian dividends are taxed much more lightly than interest income. So you get to keep more of what you earn.

utilities_stocks

Utilities perform better than bonds

Building utilities involves investing substantial sums of money up front. They generate little if any income until they’re completed and start operating. Higher interest rates increase these capital costs, of course.

Capital costs a lot more

Some investors buy utilities as an alternative to fixed-income investments, such as bonds. With interest rates quickly climbing, bonds have become increasingly attractive. Just keep in mind that many utilities regularly raise their dividends.

For example, as of late October 2022, Key Stock Emera Inc. (TSX—EMA) now pays dividends of $2.76 a share, up by 4.2 per cent. At the same time, Key Stock Fortis Inc. (TSX—FTS) has raised its dividend by 5.6 per cent, to $2.26 a share. Both offer decent dividend yields around four-to-five per cent.

Emera is geographically diversified

What’s more, the Canadian Dividend Tax Credit lets you keep more of your dividend income. Interest income, by contrast, is fully taxed at your marginal tax rate.

Emera subsidiary Nova Scotia Power, or NSP, is locked in a rate dispute with the Province of Nova Scotia, not the provincial regulator. Nova Scotia proposes limiting NSP’s rate increase to 1.8 per cent through to 2024 (excluding changes in the cost of fuel). NSP wants more. It points out that it had planned to invest $1 billion. This is to power 80 per cent of its operations with renewable energy and be off coal by 2030.

NSP had also planned to invest to make the province’s electrical grid more resilient to storms and hurricanes. Emera threatened to invest less unless it’s allowed to raise its rates.

This poses a political problem: deny a rate increase and you put important investments in jeopardy; accept a rate increase and you face charges that financiers in Toronto are getting rich from the sweat, blood and tears of Nova Scotians.

Despite this rate dispute, we expect Emera to prosper. It’s geographically diverse with energy and services operations located in Canada, the United States, and three Caribbean countries. Emera has $36 billion in assets. In 2021, it generated revenue of more than $5.7 billion.

This is an edited version of an article that was originally published for subscribers in the October 28, 2022 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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