There’s a touch of a problem when it comes to dividend stocks these days. That boring Government of Canada bond is suddenly paying more.
Canada’s 10-year benchmark government bond yielded 4% on September 28. Meanwhile, one of the country’s most reliable dividend growers currently yields about 3.4%.
If I needed dependable income for the next few years, that bond would deserve my attention. Give me 10 years, though, and I’d still want Fortis (TSX: FTS).
A bond wins one round
Government bonds have an enormous advantage, and that’s certainty. Buy an individual Government of Canada bond and hold it to maturity, and the future payments are known, assuming the federal government meets its obligations. Stocks don’t offer anything comparable. Dividends can be cut, and share prices can plunge.
That’s why bonds belong in plenty of portfolios, particularly when money will be needed soon. The weakness appears over longer periods. A fixed bond doesn’t decide five years from now that inflation has become annoying and increase your coupon. Its payments remain fixed.
A quality dividend stock can potentially grow its payment. That’s an important distinction for investors building passive income that may need to fund increasingly expensive groceries 10 years from now.
FTS
Fortis owns nine regulated electric and natural-gas utilities serving about 3.5 million customers across Canada, the United States, and the Caribbean. Regulated doesn’t mean Fortis can charge whatever it likes.
Utilities invest in approved infrastructure. Regulators then allow them an opportunity to earn a return on that investment. As Fortis expands its rate base, earnings can grow with it.
Management plans to spend $28.8 billion between 2026 and 2030. That investment is expected to increase the rate base from $42.4 billion in 2025 to $57.9 billion in 2030, representing roughly 7% annual growth. Furthermore, Fortis expects that expansion to support annual dividend growth of 4% to 6% through 2030.
Ten years of growth
Fortis has increased its dividend for 52 consecutive years. The annual dividend declared in 2016 was $1.55 per share. Today’s $0.64 quarterly payment represents a $2.56 annualized run rate. That’s roughly 5.1% compound annual growth over a decade!
That historical growth isn’t a promise for the next decade. It does show why I’d compare more than today’s yields. At Fortis’ recent price of $74.66, the current dividend yield is approximately 3.4%. The government bond wins the starting-income contest.
Fortis gets the opportunity to increase its payout. That growing income, combined with potential earnings and share-price growth, is why I’d prefer the stock for money I can leave invested for a decade.
The price isn’t perfect
Fortis isn’t cheap in an obvious way. Its shares have held up well while higher bond yields have made utilities compete against increasingly attractive fixed-income investments. That’s a real risk.
Higher rates also increase financing costs for utilities, while major infrastructure projects can face cost overruns, regulatory delays, and disappointing allowed returns. Fortis needs its $28.8 billion capital plan to translate into earnings rather than merely produce an impressive collection of construction invoices.
I’d therefore buy gradually rather than chase the stock. Investors building a diversified collection of Canadian dividend stocks can also use bonds alongside equities instead of forcing one investment to do both jobs.
Bottom line
A 4% government bond yield is attractive precisely because investors don’t need a heroic outcome to earn it. For money I need predictably, I’d take that seriously.
For money I can invest for 10 years, Fortis offers something the bond can’t: the possibility that my income cheque becomes larger along the way. The bond may pay more today. I’d rather give Fortis a decade to catch up.