Today, it’s a paradise shopping for attractive dividend income from TSX utility stocks for long-term investors. Since the Bank of Canada started increasing the policy interest rate in 2022 to curb high inflation, utility stocks have experienced a meaningful correction, as illustrated by the price action of iShares S&P/TSX Capped Utilities Index ETF in the graph below. In the last 12 months, the exchange traded fund (ETF) has corrected 21%, pushing the fund’s cash distribution yield to about 4.2%. It is a good benchmark to compare Canadian utilities with.
XUT data by YCharts
XUT ETF has 10 holdings. Emera (TSX:EMA), Brookfield Renewable Partners L.P. (TSX:BEP.UN), and Capital Power (TSX:CPX) are three of its holdings offering attractive dividend yields of north of 6%.
Emera
The XUT fund has a weighting of about 11.4% in Emera stock. Emera consists of six regulated utilities. Specifically, Florida Electric and Canada Electric contribute about 53% and 20%, respectively, to its adjusted net income.
In the last 12 months, the regulated utility stock has declined about 18.9%. At $45.33 per share at writing, it offers a dividend yield of almost 6.1%. At this price, the 12-month analyst consensus price target represents a good discount of 22%.
Given its stable adjusted earnings and estimated payout ratio of about 89% of adjusted earnings this year, EMA should be able to maintain its payout. Emera is targeting a dividend increase of 4–5% per year through 2026.
Brookfield Renewable Partners
The fund has about 5.6% in Brookfield Renewable Partners stock, which could be a good holding in tax-advantaged accounts like Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs).
Over the last year or so, the renewable power and decarbonization solutions utility put a record of 3,400 MW of projects into service. It’s well positioned to continue its growth path, targeting long-term returns of 12–15%. The renewable power developer has 134 GW of projects in its development pipeline, from which it expects to put 18 GW into service over the next three years.
BEP maintains an investment-grade S&P credit rating of BBB+. It has ample liquidity and relatively predictable interest expenses since it has 98% long-term, fixed-rate debt.
Importantly, the dividend stock trades at a compelling valuation for long-term investing. In the last 12 months, BEP.UN has corrected approximately 35%! At $27.88 per unit at writing, it offers a juicy cash distribution yield of about 6.6%. Analysts believe it’s undervalued by a whopping 41%! Investors who can ride through the market volatility could be immensely rewarded.
Capital Power
XUT has about 3.9% in Capital Power, which generates quality cash flows from a contracted and merchant power generation portfolio. The power producer maintains an investment-grade S&P credit rating of BBB-.
The stock is down north of 23% over the last 12 months, bringing the dividend stock to a discount of close to 27% at $35.90, according to the 12-month analyst consensus price target. Like Emera and Brookfield Renewable Partners, Capital Power is also a Canadian Dividend Aristocrat. It plans to increase its dividend by about 6% per year through 2025, which will bump up its payout currently yielding 6.85%.
