Fortis (TSX:FTS) stock has been beaten down severely over the past year, thanks in part to higher rates and investor distaste for the utility space. Indeed, utilities have been in for a brutal year, even as the broader market saw the tech trade gain ground. With a recession likely around the corner, it certainly makes sense to check out the utility scene for a shot at greater value.
Fortis stock remains one of my favourite bond proxies for all economic climates. It’s terrific to own when interest rates are less than 2%. These days, though, you can get a lot more from risk-free assets. And it’s not hard to imagine many Canadians reaching for the juicy Guaranteed Investment Certificates (GICs) and higher-yielding bonds after a year of fast and furious interest rate hikes.
Dividend stocks go against higher-rate, risk-free investments
Simply put, Fortis stock and other high-quality bond proxies like it have more competition. And that’s a major reason shares have been driven lower of late, all while its yield swells a bit higher.
Today, FTS stock trades at $55 and change per share. That’s pretty much where it was back in late 2019. Indeed, the stock hasn’t been a market crusher by any stretch of the imagination. And while the stock may be far off from a sharp rally, I view the risk/reward scenario as more than favourable as the economy wobbles and the consumer looks to put their wallet away while tightening up the purse strings.
Fortis is heavily regulated, with less sensitivity to the economy. Canada’s economy could contract considerably for more than a year, and Fortis stock will not feel the rumbles nearly as much as other companies. That’s the beauty of being a highly regulated utility. Looking ahead, expect single-digit percentage dividend growth. It’s what the firm has been serving up, regardless of how hot or cold the economy has been.
GICs still look more enticing if you’re shying away from risk
At writing, the stock yields 4.34%. That’s close to the highest it’s been in recent memory. Though you could score more yield from other dividend stocks or a better rate from your risk-free GIC, I’d argue that by betting on risk-free assets, you’re leaving quite a bit of capital gains potential on the table.
Fortis stock is feeling the wind at its head. But it won’t always be like this. Sooner or later, rates will retreat, perhaps due to a rockier-than-expected economic landing! And the next thing you know, bond proxies, like Fortis stock, will be in demand again.
The bottom line on Fortis stock
For now, Fortis stock’s chart makes it seem like dead money. However, for long-term thinkers, I think it’s a golden opportunity to get a solid risk/reward scenario for the next 10 years and beyond.
In 10 years, the days of 5%-rate GICs may be history. But Fortis stock will likely keep raising its payout year after year. And if you lock in a yield north of 4.3%, I think you’ll be happy with the results in a decade’s time, especially if you’re building a passive-income stream to live off for your future retirement. At 18.6 times trailing price to earnings, shares are way too cheap, given the stability you’ll get.
