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Despite the credible performance of the TSX last month, no one can predict how November 2021 will unfold. The main Canadian stock index saw some declines in October and posted a 14-day streak in a row. While the Bank of Canada has kept the benchmark interest rate at 0.25%, there is pressure to raise it due to rising inflation.
The final stretch could be rocky and investors should be prepared. Usually when the going gets tough, many people flock to Fortis (TSX: FTS) (NYSE: FTS) for capital protection and dividend security. However, yield-hungry investors do not find the utility stock dividend yield (3.89%) acceptable.
In addition to outperforming the Fortis (+ 25.44% vs. + 8.91%) so far in 2021, Diverse royalty (TSX: DIV) pays an overly generous 7.5% dividend. In terms of price, the royalty share is trading at $ 2.80 per share, compared to $ 55.09 for the top utility share.
By comparison, an investment of $ 20,000 in Fortis will generate $ 778 in passive income. However, a position of $ 10,000 in Diversified Royalty will yield dividends of $ 750. If so, should income investors buy Fortis or bet on the high yielding multi-royalty company?
Leading defensive asset
Utility stocks are boring investments for some players in the stock market. For example, Fortis barely fluctuates, so you can’t expect much on capital gains. However, it is not a dividend trap when the market goes haywire. Some companies that pay dividends will reduce or stop paying during an economic downturn.
The regulated $ 25.95 billion electric and utility company did not disappoint loyal investors. Fortis boasts 47 consecutive years of dividend increases to achieve Dividend Aristocrat status. In addition, it has a $ 1.8 billion investment plan that is expected to increase the capital base to $ 40.3 billion by 2025.
Fortis’s search for additional expansion and expansion opportunities continues, in particular with the transportation networks in the United States. The transition to a cleaner energy future began as part of the company-wide goal of achieving a 75% reduction in carbon emissions by 2025.
Management expects long-term rate base growth to support earnings growth. The current target is also to reward investors with annual dividend growth of around 6% through 2025. In the first half of 2021, Fortis announced a 4% increase in net profit compared to the same period in 2020.
Diversified Royalty’s royalty partners have experienced business reversals during the COVID year. Fortunately, things are improving for positive trends at the respective companies of AIR MILES, M. Lube, M. Mikes, Sutton, Nurse Next Door and Oxford Learning Center.
Diversified Royalty saw decent revenue growth and significantly improved bottom line after the two quarters of 2021. Total revenue increased 24% to $ 16.78 million, while profit net reached $ 9.34 million. In the first half of 2020, the multi-royalty company lost $ 8.85 million.
Due to the impressive financial results and positive trends in the royalty business, the board of directors approved a 5% increase in the monthly dividend. Monthly income stocks attract investors because the dividend frequency is 12 times a year instead of the usual four.
Know your risk appetite
Choosing between Fortis and Diversified Royalty depends on your risk appetite, affordability and dividend yield. Risk averse investors would likely look into utility stocks. The royalty company is quite risky, although the price is insanely low and the dividend yield is inflated.