Do Utilities Make Good Buy-and-Hold Dividend Stocks?

Utilities are a key component of solid dividend portfolios. Here are 3 utilities that provide current yields of about 3.5-4.4%. They’re fairly valued. Going through these examples will lead to an answer for the question in the title.

electric distribution

Brookfield Infrastructure

Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP) split-adjusted funds from operations per unit (“FFOPU”) increased by 2% in 2020 during the pandemic, proving itself to be a defensive business in the face of adversity.

In the first half of the year (“H1”), BIP rebounded to growth with its split-adjusted FFOPU rising almost 19% to US$1.77. Contributing factors include an economic rebound, management taking advantage of market volatility during the 2020 pandemic market crash (such as by scooping up shares of Inter Pipeline (TSX:IPL) at basement prices), capital recycling, etc. Its H1 2021 payout ratio was 58% of FFO, which is a healthy payout ratio.

BIP remains one of our favourite utilities for income. We trust that management can live up to its word by increasing its cash distribution by 5-9% per year going forward. 


Fortis’s (TSX:FTS)(NYSE:FTS) adjusted earnings per share (“EPS”) marginally increased in 2020 during the pandemic — once again, it had proven itself as a defensive business.

In H1, Fortis reported adjusted EPS growth of 7.3% to C$1.32. Its payout ratio in this period was 77%, which is sustainable given Fortis’s predictability and stability. The utility is also on track to deliver the C$3.8 billion capital plan for 2021. Expect a dividend increase of about 6% next month.


Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN) adjusted EPS rose 2% to US$0.64 in 2020, while adjusted EBITDA, a cash flow proxy, climbed 4% to US$870 million. 

The utility’s 10-year dividend growth rate is 9.7%. AQN’s 2020 dividend increase was 10%. The 2020 payout ratio was about 95%. This is a relatively high payout ratio.

In H1, AQN’s adjusted EBITDA climbed 26% to US$527.8 million, while its adjusted EPS rose 25% to US$0.35, equating to a payout ratio of 93% for the period. It has been growing by acquisitions and project development.

We would feel more comfortable if the company increased its dividend at a lower rate than its earnings growth going forward so that it can lower its payout ratio to the 70-80% level.

That said, its asset base is solid — about 67% in regulated utilities and one-third in renewable energy generation that are backed by long-term contracts.

AQN provides a unique opportunity to invest in a diverse range of assets through one stock. Its regulated utility operations include natural gas, electric, water, and wastewater collection. Its non-regulated renewable portfolio include generation from wind, solar, hydro, and thermal energy. 

Investor Takeaway

Do utilities make good buy-and-hold dividend stocks? Be cautious not to paint with a broad brush and assume all utilities are good dividend investments. Be selective!

We would be comfortable buying and holding BIP and FTS for growing income, after purchasing shares at good valuations. Given AQN’s relatively high payout ratio, it requires more attention from shareholders, in my humble opinion.

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Disclosure: As of writing, we own shares of AQN, BIP.UN, and FTS.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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