I am trying to determine the dividend payout ratio for Algonquin Power & Utilities Corp. (AQN) but different sources give different numbers. Can you help?
Based on analysts’ notes I have read, Algonquin’s estimated payout ratio for 2020 is about 94 per cent. This is calculated as the dividend per share divided by estimated earnings per share adjusted for one-time items.
While that may seem high, it’s not a cause for concern in Algonquin’s case. The company’s utility and renewable power businesses deliver secure cash flows, and Algonquin’s US$9.4-billion investment program over the next five years is expected to drive annual growth of 8 to 10 per cent in adjusted earnings.
Algonquin’s growing earnings should allow it to continue raising its dividend (which is paid in U.S. dollars). At its investor day in December, Algonquin signalled that it plans to increase the dividend by 10 per cent this year. After that, analysts expect that dividend growth will moderate, supporting Algonquin’s goal to have a long-term payout ratio of 80 to 90 per cent.
Nelson Ng, an analyst with RBC Dominion Securities, estimated in a recent note that, if Algonquin achieves growth of 9 per cent in earnings per share, it could raise its dividend by about 6 per cent annually starting in 2022 while bringing the payout ratio down to the midpoint of its target range.
Bottom line: Don’t be put off by Algonquin’s high payout ratio. The dividend will almost certainly continue to grow for many years to come, which makes its current yield of 4 per cent even more attractive.
My husband and I recently sold a property in the United States and have about US$180,000 to invest in a non-registered account. Our preference is to not change the currency now, since our dollar is so low. Several years ago you wrote an article about Canadian companies listed on the Toronto Stock Exchange that pay dividends in U.S. dollars but are still eligible for the Canadian dividend tax credit. Could you please explain how we would go about investing in such companies and whether it makes sense to do so?
Let me clarify a couple of things. First, a low Canadian dollar is actually a benefit if you’re converting U.S. dollars back to loonies. At the Canadian dollar’s current value of about 79 US cents, your US$180,000 is worth about $227,848 (calculated as 180,000 divided by 0.79). If our currency were to rise – as it’s been doing recently – you would get fewer Canadian dollars, not more.
Second, the vast majority of shares that trade on the Toronto Stock Exchange are denominated in Canadian dollars. So even if you wanted to buy a Canadian company on the TSX that pays dividends in U.S. dollars, such as Algonquin Power & Utilities Corp. (AQN), Magna International Inc. (MG) or Brookfield Asset Management Inc. (BAM.A), you would still have to convert your U.S. dollars to Canadian dollars.
Another option – which doesn’t require currency conversion – is to purchase shares of Canadian companies in U.S. dollars on the New York Stock Exchange. Dozens of Canadian stocks are interlisted on the NYSE.
But you will have the most flexibility if you simply convert your U.S. dollars to Canadian dollars. You could do this through your bank, but if you shop around you’ll likely find a much better exchange rate.
Paul Kurucz, a consultant who advises Canadians who are moving back to Canada or repatriating funds, says a foreign exchange company is the way to go.
“People are often uncertain about how and when to repatriate funds to Canada. The use of a foreign exchange company will typically save Canadians hundreds and usually thousands of dollars,” Mr. Kurucz said.
“A client of mine sold her house in Houston and after using a foreign exchange firm at my recommendation she estimated a savings of $9,000 over what her Canadian bank quoted her net of wire transfer fees.”
Companies such as Knightsbridge Foreign Exchange, OFX and TransferWise “all do a super job,” he said.
Most investment advisers recommend having a diversified portfolio with U.S. and international stocks in addition to Canadian ones. Your dividend growth portfolio seems to consist of Canadian stocks only. Why is that?
The model Yield Hog Dividend Growth Portfolio, which you can view online at tgam.ca/dividendportfolio, actually does have a small position in U.S. stocks through the iShares Core Dividend Growth ETF (DGRO). The purpose of the portfolio is to provide a real-time illustration of dividend growth investing, and the focus on Canadian stocks reflects my comfort level with the companies and my desire to minimize currency volatility. That said, in hindsight I would have been better off with more U.S. exposure, as DGRO has been one of the portfolio’s top performers.
As much as I love dividend growth stocks, I also believe that diversification is important. In my personal portfolio, I own several exchange-traded funds, including an S&P 500 index fund that provides exposure to companies – such as information technology stocks – that often pay no dividends but that have produced excellent returns.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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John Heinzl