Fortis (TSX:FTS) has been increasing its dividend annually for decades while delivering great total returns for its shareholders. New investors are wondering if FTS stock is still a good buy for a Self-Directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividend income and long-term capital gains.
Fortis share price
Fortis is trading around $72.00 at the time of writing. The stock is up about 18% over the past year, continuing its recovery from the pullback in 2022 and 2023.
Fortis has been in business since 1885 and is headquartered in St. John’s, Newfoundland and Labrador. The utility giant has $75 billion in assets and employs 9,600 people across Canada, the United States and the Caribbean. Businesses include power generation facilities, electrical transmission networks, and natural gas distribution companies.
Fortis grows through a combination of strategic acquisitions and organic projects. The company has not made major purchases for several years, but continues to expand its asset base through its development program. In fact, Fortis is working on $28.8 billion of capital projects that will increase the interest base at a compound annual rate of approximately 7% through 2029. As the new assets are completed and put into service, the boost to cash flow should support planned annual dividend increases of 4% to 6% over five years.
Fortis has increased its dividend every year for the past 52 years, so investors should feel comfortable with the guidelines. Almost all income comes from rate-regulated assets. This means that cash flow is generally predictable, which is one of the reasons the company can plan capital investments and predict dividend growth well into the future.
Investors who buy FTS shares at current levels can get a dividend yield of 3.5%. Fortis offers a 2% discount on shares purchased through the Dividend Reinvestment Plan (DRIP). That benefit accumulates over time for investors who take advantage of the infusion to harness the power of compounding.
A $10,000 investment in Fortis 30 years ago, if the dividends were reinvested, would be worth about $345,000 today.
Risks
A sharp rise in interest rates would be a headwind for Fortis, as it was in 2022 and 2023, when the Bank of Canada and the US Federal Reserve aggressively raised rates to combat inflation. Fortis uses debt to finance part of its capital program, so the increase in debt costs could hit earnings and reduce the cash available for dividend payments.
The US is expected to cut interest rates in 2026. Canada is likely to keep interest rates at current levels after the series of cuts it made in 2024 and 2025. However, a jump in inflation could force central banks to stay at current interest rates for longer, or even raise interest rates again. In that scenario, Fortis investors could see the share price come under pressure.
The bottom line
Near-term turbulence is expected in the broader market due to the high valuation and continued uncertainty over rates. That said, Fortis remains an attractive choice for a buy-and-hold portfolio focused on dividends and long-term total returns. Weakness in the stock would be an opportunity to add to a position.
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