About my last article discussing Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN) as a high-yield stock, some readers gave feedback about the fact that rising interest rates are negative for utilities like Algonquin that have high debt levels because of the nature of their businesses. Rising interest rates imply that their borrowing costs are going to increase, which can dampen their growth.
In contrast to utilities, banks are expected to benefit from rising interest rates. Currently, the highest-yield Big Six Canadian Bank is Bank of Nova Scotia (TSX:BNS)(NYSE:BNS). It yields 4.3% at writing.
Just like its big Canadian bank peers, BNS stock did not cut its dividend through the last two recessions. It did freeze its dividend periodically (like its peers) because of restrictions from the regulatory body, the Office of the Superintendent of Financial Institutions (OSFI), in Canada.
Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN) consists of diversified regulated utilities across natural gas, electric, and water utilities, and non-regulated renewable energy across wind, solar, hydro, and thermal generation. Its renewable and clean energy facilities are mostly under long-term contracts (averaging about 13 years) with inflation escalations.
Regulated utility Fortis (TSX:FTS)(NYSE:FTS) has a long dividend-growth streak. It has 48 consecutive years of dividend increases, which is the second-longest streak on the TSX. Because of the transition to net-zero emissions, renewable and clean energy are good places to consider investing in. Algonquin offers the best of both worlds in having regulated utilities and a renewable portfolio.
A dividend stock with a high yield
The dividend stock provides a relatively high yield of 4.8% today. According to the line of thought used in The Single Best Investment by Lowell Miller, 4.8% is a big yield because it’s 1.88 times that of the stock market yield of 2.55%. Miller thinks a yield that’s 1.5 – 2 times that of the market is high.
When the World Health Organization announced that the world was experiencing a pandemic around March 2020, the regulator tightened restrictions to prevent federally regulated financial institutions like Manulife (TSX:MFC)(NYSE:MFC) from increasing their dividends. This is why the life and health insurance company froze its dividend for eight consecutive quarters.
When the regulator lifted the ban about a month ago, Manulife quickly announced a dividend increase of almost 17.9%. Its new quarterly dividend is C$0.33 per share, equating to an annualized payout of C$1.32 per share. The negative sentiment around the stock market in the last week pressured this dividend stock lower. Consequently, investors can now buy shares for a juicy dividend yield that’s flirting with 5.7%.
The dividend stock is not a darling
For some reason, Manulife stock tends to trade at a substantial discount to its peer, Sun Life (TSX:SLF)(NYSE:SLF). Maybe it’s because of their different business mix. Sun Life’s business is much more diversified, leading to more quality earnings. Here’s an overview of Sun Life’s net income diversification.