More advice for a retiring friend and nephew

One has to build a solid, dividend-paying portfolio if one is to have a good trusted flow of income in retirement. A stock to consider is Emera (EMA).

First, it is selling in bear market territory. It could go lower and it might but it is well off its recent highs with a drop of more than 20%. 

 

 

At a price of $46.93, EMA is yielding 6.12%. Impressive. Morningstar has Emera on its Canadian Income Pick List for good reason and recently put Emera on the Morningstar Canadian Core List as well.

All retirement portfolios should have some exposure to the utilities sector. Emera is an excellent utility. If one did not have any cash in utilities, EMA today presents an investment opportunity.

The utilities sector is considered a defensive play as people need electricity regardless of economic conditions. With stable earnings and consistent dividends, utilities are less sensitive to market fluctuations. During recessions, defensive sectors like utilities tend to outperform the broader market. But, this does not mean the sector will not lose money in a downturn. Utilities can, and do, take a dive like any other investment.

An investor might allocate 4% of their retirement portfolio to Emera, investing half of that amount today and, if the price retreats, investing the other half.

Another good utility is Fortis (FTS). Fortis is down today but nowhere near as much as Emera. Fortis is correcting. It is off its recent high by about 15%. Selling at $52.49, it is yielding 4.5% today. Again, buying 2% today and 2% later seems like a fair approach.

Utilities are known to increase their dividends regularly. The dividend growth rate (DGR) for Emera is 11.66% over the past three years and 9.38% over the past decade. According to Investopedia, the DGR is the annualized percentage rate of growth of a dividend over a set number of years.

Aiming to invest 10% of a retirement portfolio in utilities is not unreasonable. A portfolio of $400,000 would have $40,000 distributed among a number of Canadian utilities. For instance, if one invested in Canadian Utilities, Emera and Fortis, (2-4-4%), this would generate about $2175 annually.

In the interest of full discloser, I have 3.45% of my portfolio in Emera. I am looking to add another 200 shares if and when the stock price falls a bit more. I also own Fortis and I do not own Canadian Utilities at this time. I do own Altagas (ALA). A stock many include in the utilities sector.