Before I get started, let’s get a quote from Bill Gross, who manages the world’s largest bond fund at PIMCO which has $1 trillion of assets under management.  “Utilities yield 5% to 6%, not near zero, and in a low growth environment, it seems to me that a company’s stock should yield more than its less risky debt, and many utilities provide just that opportunity.”

Scanning today’s bond offering sheet from RBC DS, I see a 2014 TransCanada Bond yielding a whopping 3.5% and a 2014 Bell Canada bond yielding 3.4%.  TransCanada’s stock currently yields 4.7% and Bell Canada’s stock yields 6%. Bill, you are correct sir.

The mind boggling question is why would anybody buy these bonds right now?  If one adds taxes and inflation to the mix, the yield on these bonds becomes even worse when compared to their dividend counterparts.  And here’s the death blow.  Over the next five years, we are confident that TransCanada, Canadian Utilities, Bell Canada and Rogers, to name some of our favourites, will raise their dividend each and every year.

Let’s take a quick look at TransCanada (TRP).  TRP operates natural gas pipelines and provides power generation all across North America.  Over the next four years, TRP is expected to spend $22 billion on new pipeline and power generation projects, which should increase earnings before interest, taxes and depreciation by 50% and cash flow by 10% per annum.  The company will fund these projects with a mixture of free cash flow and debt.  While project execution risk is a concern, TRP has a great track record of getting huge capital projects completed on time and budget.  By 2013, TRP could generate earnings of close to $3, which would imply a stock price of $52 or 55% above its current price.

If you buy TRP’s stock you have a chance of getting a 55% upside plus a 5% dividend each and every year all tax preferred versus 3.5% of straight income per year. The choice looks clear to me.