America is in the middle of a massive retirement tsunami. Starting in 2010, 10,000 baby boomers began reaching the retirement age of 65 every single day. Looking forward, this trend is just beginning. 10,000 more boomers will reach the retirement age of 65 every day for the next 12 years, all the way until 2030.
With bond yields stuck near record lows, boomers are desperate to find safe alternatives to generate retirement income. One of the most popular places they have been shifting their capital is utility stocks.
Utility stocks offer two things that retirees value. First, they are generally a lot more stable than the broader stock market and particularly growth stocks. Second, utility stocks usually offer excellent dividends.
The popularity of utility stocks has led to big gains for the Vanguard Utilities Index Fund ETF (NYSE: VPU).
In the last ten years, this ETF has gained 127.7%, outperforming the S&P 500's return by 17%. Take a look below.
Those gains have been great for current shareholders. However, for new boomers looking, it has created a problem: U.S. utility stocks look pricey. VPU's forward P/E ratio of 18.5 is in line with the S&P 500, despite little opportunity for growth.
Worse, yields have been compressed. VPU's current dividend yield of 3.3% is down from more than 5% in 2009.
Canadian Utility Stocks Crush Their U.S. Counterparts
Canadian utility stocks offer better yields than can be found south of the border.
The iShares S&P/TSX Capped Utilities ETF (NYSE: XUT) holds a basket of Canadian utility stocks. This fund offers a current yield of 3.4%, a 7% premium to VPU. That may seem insignificant at first glance. But beneath the surface things get interesting.
Many of this funds individual holdings offer yields north of 4%. In fact, its two highest yielding holdings offer current yields of 6.5%. Below is a list of six of its highest yielding holdings.
|Hydro One Ltd||H||3.7%|
|Algonquin Power & Utilities||AQN||4.4%|
|Capital Power Corp||CPX||6.5%|
|Superior Plus Corp||SPB||6.5%|
From this group I have chosen to highlight Emera and Capital Power Corp because of their high yields and impressive dividend growth.
Emera (TSE: EMA) is one of Canada's largest utilities, with a market cap of $10 billion. Headquartered in Halifax, Nova Scotia, its specialty is electricity generation and distribution, but it also operates in gas transmission. In 2016 Emera owned $16 billion in assets and generated more than $4 billion in revenue.
Emera is one of the best Canadian utility stocks for two reasons.
First, its dividend yield of 4.4% is a 37% premium to VPU and a 29% premium to XUT.
Second, Emera has displayed very steady dividend growth. In the last three years, its dividend has grown to $2.09 from $1.48, a 41% increase. Take a look below.
Capital Power Corp (TSE: CPX) is a Canadian utility company headquartered in Edmonton, Alberta. Capital specializes in electricity generation and distribution, but also operates in natural gas. CPX isn't quite as big as Emera, with a market cap of $2.5 billion.
Despite its smaller size, Capital is a dividend powerhouse. Its dividend yield of 6.5% ranks among the best in the industry and is an 88% premium to XUT.
Like Emera, Capital has been steadily growing its dividend. In the last three years its dividend has grown 19.5%. Take a look below.
Risks To Consider: Stocks are almost always going to be more volatile than bonds and fixed-income securities. Although utilities are among the most stable sectors in the stock market, they are still probably going to be more volatile that most classes of bonds.
Action To Take: Income investors looking for better yields on their utility stocks should look north of the border. Canadian utility stocks offer better yields than their U.S. counterparts and can give your income a portfolio a big boost.
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