If the Fed Keeps Cutting Interest Rates, This Stock Will Be a Winner

Fortis (TSX:FTS) stock is a dividend-growth juggernaut that can keep on winning as the Fed and Bank of Canada cut rates.

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With the U.S. Federal Reserve (the Fed) and Bank of Canada now slashing interest rates, investors may wish to take advantage of the relatively high yielders while they’re still out there. Undoubtedly, inflation has seemingly been conquered without having to send the economy to its knees. Still, investors shouldn’t expect rates to free-fall back to their multi-year lows.

Undoubtedly, rates on the 10-year U.S. Treasury note crept higher earlier this month, sparking a bit of volatility in a market that may have become overheated at the hands of rate cut expectations. In any case, I view any such rate-induced market dips as a “second call” for passive-income investors to punch their ticket to high-yielding dividend stocks at a slightly cheaper multiple.

Undoubtedly, the rate-sensitive plays that have risen on the back of Bank of Canada and Fed rate cuts have been giving back some of the gains of late. Though much lower rates are still likely in the cards, investors shouldn’t expect a smooth ride-up in any of the rate-sensitive securities.

Fortis stock is a dividend-growth sleeper pick to play lower rates

Shares of utility firm Fortis (TSX:FTS) have exploded around 17% from its June lows. Starting in September, the stock ran into a bit of choppiness, fluctuating wildly in both directions. Though shares are around 1% from making new 52-week highs, the name looks quite toppy at current levels, especially as the rate-sensitive plays look to give up more ground after a robust summer surge.

The company’s dividend yield sits at just shy of 4%, which is still quite generous for such a defensive utility with a growth profile that can sustain mid-single-digit sales growth every single year. While you could certainly score a much higher yield (think north of 7% with some of the battered Canadian telecom stocks) elsewhere, I believe that income investors seeking to take some risk off the table should stick with Fortis. The company may not be exciting, but it does have a five-year investment plan that will keep its solid dividend-growth streak going strong.

If you’re more than 10 years away from retirement and are willing to forego a bit of yield for 4-6% in annualized dividend growth (as per Fortis’s most recent guidance), shares of FTS could make for a fantastic buy right here. Indeed, the 4% yield is somewhat attractive, but what’s even more enticing is how much the yield based on your principal will grow over the next 10-15 years.

Investors can now expect Fortis’s growth profile to fuel mid-single-digit dividend growth through 2029. After that, I wouldn’t be surprised to hear Fortis pursuing initiatives to keep such a growth pace going into the early 2030s. Indeed, Fortis is a magnificent dividend grower that can hold its own and continue spoiling shareholders even in the worst of economic storms.

Fortis stock looks dirt cheap, given its promising trajectory

At $61 and change per share, FTS stock also looks quite undervalued for such a high-quality dividend grower that could continue to ascend as the borrowing costs look to plunge further going into the new year.

The stock trades at 19.21 times trailing price to earnings, which isn’t too high a price to pay for one of the most durable bond proxies in the market. It’s been a rather sluggish past five years for the name, but as central banks continue to slash rates, I view FTS stock as one of the names that can make up for lost time in the next five 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 Joey Frenette has positions in Fortis. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.

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