How one determines what factors define the “best dividend” on any index is a hot topic of debate; however, the dividend track record of Canadian utilities giant Fortis Inc. (TSX:FTS)(NYSE:FTS) certainly makes the case that Fortis deserves to be compared with the best dividend-centred companies on the TSX.
Looking only at Fortis’s current dividend yield of 3.5% would definitely provide an inadequate picture of the long-term strength of this dividend powerhouse. While many analysts spend perhaps too much time analyzing yield as the primary factor to consider with an income-producing equity security, other factors, such as the long-term dividend-growth rate as well as the track record of consecutive annual dividend hikes, put Fortis in an elite group; it’s had over 43 straight years of dividend increases.
Many iconic investing gurus, including Benjamin Graham, have pointed to long-term track records of dividend distributions as one of the primary metrics on which a group of securities should be assessed. Companies with at least 10 years of consecutive dividend increases should certainly be treated differently than those which have just started paying a dividend or have uneven dividend increases/cuts over a span of time. Continually increasing a distribution over a long period of time is very difficult to do, as it requires improved profitability year after year — something very few companies can do in good economic times and in bad.
The nature of Fortis’s underlying business (utilities) is one of the primary reasons why this company has been able to maintain extremely consistent dividend growth over time. Utilities tend to grow at a very predictable rate and, when managed well, can predictably and effectively deliver dividend increases in the low to high single digits every single year. Over the next five years, Fortis anticipates it will be able to maintain a pace of dividend increases of approximately 6%; that’s in line with historical averages and a very impressive feat overall.
Bottom line
Yield is not everything, and investors seeking long-term income-producing securities should consider utilities such as Fortis as a part of a well-balanced portfolio. Accepting a modest 3.5% yield today with the expectation that Fortis’s management team will continue to raise its dividend each year for the next five years would mean a five-year forward dividend yield of 4.7%. In a market filled with low-yield options, a 4.7% yield sounds pretty good.
Stay Foolish, my friends.
