3 Reasons to Add This Juicy 5% Dividend Yield to Your Portfolio

Cash in on the trend to renewable energy and bolster your portfolio’s yield by investing in Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN).

| More on:
The Motley Fool

In early January of this year, renewable energy utility Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN) rewarded loyal shareholders with yet another dividend hike. This amounted to a very juicy 10% increase in the existing dividend and represents the seventh straight annual dividend hike. Algonquin now offers a very attractive 5%. While these regular dividend hikes make Algonquin an appealing investment, they aren’t the only reason for investors to add it to their portfolio. 

Now what?

Firstly, the secular trend to renewable energy globally is gaining considerable momentum, and this will act as a powerful tailwind for growth for renewable energy companies such as Algonquin.

Currently, it operates a portfolio of renewable power-generating assets across solar, hydro, and wind facilities located in North America with 1,150 megawatts of capacity.

Algonquin is well positioned to take further advantage of the push for clean electricity generation because of its portfolio of renewable energy projects under development. These are expected to come online sometime between now and 2020, boosting total installed capacity by 351 megawatts.

More importantly, its power-generation business provides it with a steady and consistent source of revenue, because about 86% of its electrical output is contractually locked in with an average weighted contact life of 15 years. It is this dependable earnings stream that gives Algonquin the ability to finance further projects and acquisitions that will boost its electricity-producing capacity.

Secondly, Algonquin completed the transformative $3.2 billion purchase of The Empire District Electric Company, which boosted its U.S. presence.

This acquisition gave it access to new markets and added $4.1 billion of utility assets and 218,000 customers to Algonquin’s existing U.S. operations.

As the deal is bedded down and efficiencies across complementary operations are implemented, it will give Algonquin’s earnings a solid bump. This deal (and the resultant earnings boost) was a key reason for management’s decision to reward investors with that juicy 10% dividend hike earlier this year.

Algonquin is positioned to benefit from higher U.S. economic growth triggered by Trump’s proposed fiscal stimulus and his planned corporate tax cuts.

Finally, Algonquin maintains a rock-solid balance sheet.

This is an important consideration because utilities are a capital-intensive business. Considerable funding is required to maintain operations and provide the liquidity required to fund projects as well as further acquisitions that will expand the existing asset base and boost capacity.

Algonquin is in a strong position in this regard.

It finished the third quarter 2016 with almost $48 million in cash and $1.9 billion in long-term debt. Crucially, Algonquin bolstered its balance sheet by successfully completing a $300 million capital raising in January of this year, the proceeds of which are earmarked for debt repayments and general expenses.

Furthermore, net debt comes to just over four times EBITDA. This seems high in comparison to other industries, but it’s is quite a conservative number for a diversified electricity and other services utility. For example, long-time investor favourite Fortis Inc. (TSX:FTS)(NYSE:FTS) has net debt totaling a whopping 11 times EBITDA, and Emera Inc. (TSX:EMA) has net debt of eight times EBITDA. 

So what?

Algonquin is one of the best picks among Canadian utilities. It will not only benefit from the secular trend to clean renewable sources of energy but also from its solid U.S. operational footprint. This is because of Trump’s plan to cut corporate taxes and stimulate economic growth. These factors will give its earnings a healthy bump, supporting further dividend increases in coming years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

More on Dividend Stocks

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

2 Utility Stocks That Are Smart Buys for Canadians in November

Are you looking for some of the smart buys to consider in November? These utility stocks offer growth and a…

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Is Power Corporation of Canada Stock a Buy for its 5% Dividend Yield?

Is Power Corporation of Canada (TSX:POW) stock's 5% dividend yield worth it? Discover why this resilient stock could be a…

Read more »

hand stacks coins
Dividend Stocks

Here Are My Top 3 Dividend Stocks to Buy Now

These three dividend stocks are ideal for strengthening your portfolio and earning a stable passive income.

Read more »

man touches brain to show a good idea
Dividend Stocks

3 No-Brainer REIT Stocks to Buy Right Now for Less Than $200

REITs have long been touted as some of the best dividend stocks out there if you want recurring, strong income.…

Read more »

customer uses bank ATM
Dividend Stocks

3 Stocks Retirees Should Absolutely Love

Being a retiree doesn’t mean you should not invest in stocks. These stocks can give you the financial freedom for…

Read more »

grow money, wealth build
Dividend Stocks

3 Top High-Yield Stocks to Buy in November

If you want passive income, high yield dividend stocks are the clear choice. These are the best, and safest, out…

Read more »

Oil industry worker works in oilfield
Dividend Stocks

Is CNQ Stock a Buy for its 4.7% Dividend Yield?

Besides its attractive 4.7% annualized dividend yield, these fundamental factors make CNQ stock really attractive to buy now and hold…

Read more »

Investor wonders if it's safe to buy stocks now
Dividend Stocks

Is Restaurant Brands International Stock a Buy for its 3% Dividend?

Here's a look at whether or not Restaurant Brands International stock is a buy right now.

Read more »