3 utility stocks I plan to buy more of in 2018

3 utility stocks I plan to buy more of in 2018

When the Bank of Canada finally declared a mini-war on interest rates in 2017 (meaning, they finally went up), some investors got spooked and the rhetoric about what stocks to avoid began.

Historically, financial gurus tell investors to be selective with utilities and Real Estate Investment Trusts (REITs) in a rising interest rate climate.  You can see examples of that here.

Why worry about utilities and REITs as investments you might ask?  Because we’re told they carry more debt than other companies (in other sectors) which becomes more expensive to service as borrowing costs increase.

Forget that – if you’re a long-term investor like me.   In 2018, I’m going to be a contrarian and buy more of what I own.  I intend to buy more Canadian utility stocks to balance out my portfolio.

What stocks am I going to buy?  Here are three utilities on my watch list for 2018.

Fortis (FTS)

I currently run a DRIP for this stock in my discount brokerage account (reinvesting two (2) shares earned via dividends every quarter) but I’m looking for more.  If interest rates inch up another 25 basis points in 2018 like I expect they might, Fortis stock price might drop as more investors get spooked.  That will provide a nice buying opportunity for me.

Fortis is one of the largest utilities on our continent. Like most major utilities, Fortis generates most of its revenue via regulated contracts to the residents and businesses it serves.  Regulated contracts are good for long-term revenues.

Fortis has grown their assets from a few hundred million about thirty years ago into about $47 billion today.  They continue to grow their assets and customer base through acquisitions.  They also have a tidy dividend growth history underway.

Fortis dividends 2016

Image courtesy of Fortis website.

Algonquin Power (AQN)

I also run a DRIP for this stock inside my Registered Retirement Savings Plan (RRSP).  (Note:  for my readers in the United States reading this post, my RRSP is an account similar to your 401(k) – a tax-deferred retirement savings account.)

I’m a big fan of Algonquin Power.  Based out of Oakville, Ontario, Canada, this company is a diversified power generation, transmission and distribution utility with over $10 billion in assets across Canada and in the U.S.  I’m a fan because this company is focused on renewable energy sources, including wind, solar and hydroelectric power.  As our population demands cleaner and more sustainable energy, Algonquin Power will be there to provide it.  Last time I checked, the demand for energy (including cleaner energy) is not going anywhere.

As a shareholder, I’ve enjoyed the recent annual dividend growth rate of 10%.  I predict there is more to come.  I wouldn’t be surprised if there is a 5-10% dividend increase coming early in the new year.  Let’s hope.

Brookfield Infrastructure Partners (BIP.UN)

Quite the international foothold in just one stock!  Brookfield Infrastructure Partners operates in a multitude of sectors: utilities, transportation, energy, communications and sustainable resources.  Here are some selected details:

  • They own and manage over 2,000 km of natural gas pipelines; utility operations exist in the U.S., U.K., Chile, Columbia, Brazil and Australia.
  • They own and manage 36 ports around the world, as well as 3,600 km of toll roads in South American and India.
  • They own and manage 7,000 multi-purpose communications towers.
  • They own more than 3.7 million acres of timberland.

BIP map

Image courtesy of Brookfield Infrastructure Partners website.

What does that all mean for a shareholder like me?  Present diversification and long-term growth opportunities based on that diversification. Don’t just take my word for it.  From BIP.UN’s website:

“The company’s objective is to generate a long-term return of 12 -15% on equity and provide sustainable distributions for unitholders while targeting annual distribution growth of 5-9%. 

Brookfield Infrastructure Partners L.P.’s strategy is to acquire high quality businesses on a value basis, actively manage operations and opportunistically sell assets to reinvest capital into the business. The company has established a solid performance record, delivering compounded annual total returns of 15% since its inception in 2008.”

I will consider adding more shares for other stocks in my portfolio in 2018 however these utility companies float to the top of that sector list. These companies are increasing their cash flow over time and they are passing along some of their profits back to shareholders via dividend increases.  I intend to remain one of them for all three of these stocks.

What utility or other stocks do you have your eye on in 2018?

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, we're inching closer to our ultimate goal - owning a 7-figure investment portfolio for semi-retirement. We're almost there! Subscribe and join the journey. Learn how I'm getting there and how you can get there too!

38 Responses to "3 utility stocks I plan to buy more of in 2018"

  1. Hey Mark i agree. I will definitely add to algonquin if it dips lower. I like Brookfield renewable as well. Never got into fortis as there is not a good entry point at the moment. Is Brookfield infrastructure ok in a tfsa? Or is there withholding taxes. I have brookfield renewables in my tfsa and there’s no taxes. Just wondering if you know?

    Cheers
    Rob

    Reply
    1. BIP.UN pays dividends in USD, so just be mindful of that. Also, there is no withholding tax on Canadian-listed stocks owned inside the TFSA – this is my general understanding although I’m not a tax pro!

      Reply
      1. a bit confused I always believed that if you hold BIP in a TFSA I would have to pay some tax and it should be in my RRSP so are you saying I can hold it in my TFSA tax free. Thanks

        Reply
        1. I’m no tax pro either but I can tell you what went on in my TFSA. Dec 2016 – no tax withheld. June 2017 – $.09 tax withheld (but the very next line was a credit for $.09). Sept 2017 – no tax withheld. It seems each total payment is broken down into sub-categories and I am assuming BIP determines what those sub-categories are and what amount is applicable. Again, too complicated for my poor little pea brain to figure it all out.

          Reply
          1. BIP is tricky because it’s not just dividends they pay out. There is interest and more as part of a limited partnership I recall. I would have to confirm with investor relations the breakdown.

        2. BIP.UN is a CDN company that pays dividends in USD. So, you could hold that CDN company inside your CDN-side TFSA but you will get paid your dividends in USD $$.

          I’m not sure you’d need to pay some tax Paul. You might be thinking about BIP (U.S. stock) and not BIP.UN. If you hold BIP (U.S.-listed stock version) then yes, 15% withholding taxes will apply to U.S.-listed stocks and U.S.-listed ETFs inside your TFSA. You can check out what I’ve learned on this page here in terms of asset location and tax consequences. Again, not advice, just some things I do/consider.
          https://www.myownadvisor.ca/dividends/

          The best place to hold U.S.-listed stocks or ETFs is inside your USD $$ RRSP. I believe the second best place, as long as your tax rate is higher than 15%, is inside your USD $$ TFSA. That’s my approach.

          Reply
    2. BIP.UN is a Canadian corporation paying dividends in USD. (the same for all the Brookfield corporations)

      The tax withholding is for non-Canadian corporations and not related to the currency being paid in. In fact, BIP.UN pays in CAD while BIP pays in USD. The difference is that the company does the exchange rate for you with respect to the CAD dividend.

      Reply
  2. I like and have all three of those. With BIP and AQN paying their dividends in $US the conversion has helped. Having said that, I won’t be adding to them other than the DRIPs. I’m comfortable where I am on those. With a debenture being redeemed I’ll probably look at investing those funds but no “new” money is going into any of the portfolios anyways. I might look at some telecom. No real reason other than I don’t have a lot of weight in that sector. I’ve also considered TFII for the TFSA but I’m still pondering that. I’m in no rush.

    Reply
      1. I don’t have a $US account so everything gets converted to $C. Does the dividend get distributed as $US in a $US account? I never looked into it so I don’t really know. If it does, and a person has a use for $US (travel etc), then I can see it being a viable option.

        Reply
        1. The brokerage is likely taking a cut on the USD to CDN $$ dividend conversion. For AQN I believe you can elect to get the dividend in USD or CDN.
          https://www.theglobeandmail.com/globe-investor/investor-education/can-i-still-get-my-algonquin-dividend-in-canadian-dollars/article22164168/

          I would have to check if you can do the same with some other stocks.

          Correct, I see the advantages of getting some CDN stocks paying dividends in USD – for travel $$.

          Reply
          1. Just spent 30 minutes trying to figure out the AQN DRIP and *exactly* how it works. Threw up my hands and gave up. I do know that the last payment worked out to C$.148/share and that resulted in me getting 18 additional shares at a cost of C$13.06/share. I was unable to determine what figure they used to convert or where the DRIP stock price came from.

          2. Intense!

            I believe AQN uses the Canadian dollar equivalent of the quarterly dividend – based on the Bank of Canada closing exchange rate on the record date for the dividend. This is what other companies do, like some of the Brookfield suite of companies. I would need to confirm with investor relations there as well, exactly how they determine the stock price.

            Also, don’t forget, this company and other companies sometimes have a DRIP discount applied. Some brokerage honour the DRIP discount for AQN (5%) but others might not!
            http://www.dripprimer.ca/canadiandriplist

            Lloyd, you seem to be doing well with your dividend income – why worry about some details like that? 30 minutes of time could have been a nice cold pint!

            Time for some Sens hockey and a cold one….
            Mark

          3. I wasn’t “worried”, being retired and a part time farmer offers me the ability and time to research stuff. I find it…interesting. I was aware of the Brookfield conversion factor but could not find a similar *specific* factor for AQN. As well, AQN mentions the 5% discount but makes it seem like it is optional. I would have thought such a thing would be very specific. As to hockey, definitely not interested. When my daughter got sick I never drank and it kinda just fits now so not much interest in a cold one either.

          4. Gotcha… I think the 5% discount depends on the brokerage. Not all of them honour it, at least this is my experience.

            Good for you if you wanted to know the details. Nothing wrong with that Lloyd.

  3. I agree mark, all 3 company have good cash flow and should be increasing there dividends. My opinion is interest rates won’t rise significantly in Canada; so utilities should be part of a well diversified portfolio.

    Reply
      1. Yes, I own both CU and ACO.X which owns lots of CU. I actually bought both just recently and right now they are underwater. I invest for long run so no worries.

        Although both CU and ACO.X have not as good capital appreciation as FTS, but they are growing dividend faster than FTS.

        Talking about capital appreciation, what about EMA? It was good at both capital appreciation and better dividend growth.

        I own all these utilities and also waiting for an entry point to initiate a position with BIP. I also own some BEP. I am focusing on income right now to prepare for retirement, utilities sound like a good and stable income resource for retirement income. With market being so high, I also hoped that utilities won’t be down too much with a market crush. I have less than 10% of my asset in this sector, and feel I should add more.

        Reply
        1. EMA is a stud and I own a few hundred shares of it. Happy to do for the reasons you have highlighted! It’s now DRIPping in my wife’s TFSA.

          We own BIP.UN and BEP.UN – both DRIPping as well. We try to keep about 10-15% utilities at all times. Financial sector is hovering around 40% which is enough and I don’t want to go much higher. Telcos is about 5-10%.

          Reply
    1. Yes, but the capital appreciation has not climbed very much for CU. FTS, AQN and BIP have climbed quite a bit in recent years. I own CU, disclosure, but I’m not looking at buying more than continually DRIPping this stock like I am.

      Reply
  4. I am mostly in BIP (in USD) and EMA with some FTS. These have the highest dividend growth with a good Chowder Rule score. CPX (Capital Power) shows up on my filter but I have not looked into it much.

    I am currently allocating only 7% of my portfolio to utilities and BIP and EMA fulfill my coverage at the moment.

    Reply
    1. I own FTS, AQN, EMA and BIP (in USD) as well. I also own some CPX inside my TFSA. DRIPping all of them inside tax-free and/or tax-deferred accounts and I will continue to do so for the next 10 years.

      Reply

Post Comment