Many U.S.-based investors, and also many international investors, focus mainly on the U.S. stock market. In the U.S., there is the largest number of individual stocks, giving investors a gigantic choice of companies to invest in. The U.S. economy is also well-positioned across many different industries, including tech, healthcare, energy, and so on.
But even though many investors are focused on the U.S. stock market, looking abroad can make sense as well. Canada is a country that is not only geographically close, but that offers some attractive investment choices too. Governance and regulation aren't an issue, and fluctuations between the U.S. dollar and the Canadian dollar usually aren't very pronounced, which is an advantage versus an investment in other countries with more volatile currencies.
Here, we will showcase three Canadian stocks that could be attractive for income investors thanks to their elevated dividend yields of 5% or more.
A 'Bridge' to Income
Enbridge (ENB) is one of the largest energy infrastructure (midstream) companies in the world. Enbridge owns a wide range of assets across North America, including pipelines, storage facilities, terminals, but also some renewable energy assets such as wind parks. Some of its biggest pipelines connect Canada and the United States and are highly important due to them being the backbone of the North American energy infrastructure.
Energy infrastructure generally isn't a very fast-growing industry, but Enbridge has managed to generate compelling business growth and cash flow-per-share growth over the last decade. Between 2012 and 2022, its distributable cash flow per share grew more than 50%, for a mid-single-digit annual growth rate.
For the current year, distributable cash flows are forecasted to grow 2% on a per-share basis when denominated in U.S. dollars, due to the U.S. dollar strengthening versus the Canadian dollar, which has a negative impact on reported growth when denominated in USD. Still, Enbridge's underlying business growth was very healthy, and the company decided to raise its dividend by 3% this year, which was the 27th year of consecutive dividend increases.
Based on current prices and exchange rates, Enbridge offers a dividend yield of 6.8% today. With a dividend yield this high, not a lot of dividend growth or share price appreciation is needed -- even a low single digit annual dividend growth rate would allow Enbridge to deliver high-single digit-to low-double digit annual returns going forward. Thanks to a large backlog and a successful track record, we believe that Enbridge has a high chance of delivering this growth rate, and possibly more than that.
Own One of the 'Big Three'
TELUS Corp. (TU) is one of the "big three" Canadian telecom companies, with its two closest peers being BCE, Inc. (BCE) and Rogers Communications (RCI) . TELUS has a geographical focus on Western Canada, where it offers all kinds of telecommunication services to its customers, including wireline, wireless, and so on. TELUS is currently valued at around $30 billion and has a successful dividend growth track record, having increased its dividend for 14 years in a row (in Canadian dollars).
The company's earnings growth hasn't been strong at all over the last decade. Despite some ups and downs, the overall trend was sideways, as TELUS is not earning significantly more this year relative to a decade ago.
Going forward, things could be different, however. The company has recently been adding new customers in both its wireline segment and its wireless segment at an attractive pace, and management has also argued that its future growth will likely be stronger relative to what we have seen in the recent past. We thus believe that there will be some earnings growth going forward, although TELUS will never turn into a high-growth company.
TELUS currently pays out $1.04 per share per year, with the dividend that is declared in Canadian dollars being translated into U.S. dollars. At current prices, this pencils out to a dividend yield of 5.2%, which is compelling.
The dividend payout ratio is in the 100% range, which may give some investors pause. But since TELUS has often had cash flows that were higher than its reported net profits, the dividend should still be OK going forward.
Canada's Longest Dividend Streak
Canadian Utilities Limited (CDUAF) is a diversified energy infrastructure company that is active in electricity, pipelines, liquids, and other businesses. The company is valued at more than $7 billion and is renowned for having Canada's longest dividend growth streak, having increased its dividend for a hefty 50 years in a row (in Canadian dollars).
Canadian Utilities does not have a very strong earnings growth track record, as results can be quite cyclical. From one year to another, there can be significant swings in its profitability, both to the upside and to the downside. In 2015, for example, Canadian Utilities' profits dropped by more than half from the previous year's level. The company has always recovered from these pullbacks, however, which is why it was able to keep its dividend growth track record intact for such a long period of time.
Based on our current forecast, Canadian Utilities should be able to earn around $1.80 this year, which is up slightly from the previous year's level. At the same time, Canadian Utilities pays out around $1.40 in dividends this year, which makes for a dividend yield of 5.0% at current prices. That's a lower yield compared to Enbridge and TELUS, but the very long dividend growth track record still makes Canadian Utilities look attractive for dividend growth investors looking for long-term reliability.
With the dividend payout ratio standing at a little below 80%, the company operates with solid dividend coverage, but dividend coverage isn't exceptional. We believe that dividend growth will be in the low single digits going forward, while we forecast a mid-single-digit earnings-per-share growth rate over the coming years, thanks to rate increases and margin improvement initiatives.
This will make Canadian Utilities' dividend payout ratio decline over time, which will improve its dividend safety and which might result in additional interest in this stock from income investors. This, in turn, could result in multiple expansion down the road, especially since Canadian Utilities is currently trading below its longer-term average earnings multiple.
