Canada’s Best Utility Stocks to Buy for July 2022 and Beyond

Posted on June 30, 2022 by Dan Kent

Canadian utility stocks are often a staple in Canadian investment portfolios, for a number of reasons. Why? Well, for one, they provide stability.

Canadian utility stocks operate in a highly regulated environment, one that provides consistent revenues that lead to fewer surprises. In the end, this lowers the overall volatility of Canadian utility stocks.

Secondly, Canadian utility stocks often provide excellent dividends

Most of these companies are established and have solid roots implanted in the industry. As such, they are able to reward shareholders in the form of dividends, at least more so than high potential growth stocks.

Don't get me wrong, there are plenty of Canadian stocks in the utility sector that provide growth, primarily with renewable energy. But if you're looking for some stocks to build out the foundation of your portfolio, this is the list for you.

With interest rates hitting record lows due to COVID-19 rocking economies worldwide, utility companies are in an excellent position to outperform over the long term, and realistically these companies should have a place in every Canadian's portfolio.

Yes, interest rates will inevitably rise. In fact, we saw the Bank of Canada raise rates in March of 2022. But it will take many subsequent hikes to get back to even pre-pandemic rates.

So, are Canadian utility stocks a good investment?

Utility companies primarily deal with things like electric transmission, electricity generation, and energy infrastructure. For this reason, their cash flow is considered extremely reliable. Why?

Well, everyone needs electricity. In fact, next to heat, it's probably one of the last utility bills we'd ever let go unpaid. As a result, utility stocks will more than likely form the core of many investors' portfolios. When times get rocky and the market gets volatile, they've proven to be capable of weathering the storm. And as such, we'd view them as outstanding investments in any economic circumstances.

In fact, one of the first investments I ever made was in a regulated utility we'll talk about below.

With that said, let's get to Canada's top utility companies to look at in 2022. Keep in mind, these companies are in no particular order, and each provides a unique investment opportunity for Canadians.

Canada's Best Utility Companies to Buy in 2022 And Beyond

Fortis (TSE:FTS)

A Canadian utility stock list wouldn't be the same without Fortis (TSX:FTS).

The company is one of the top 15 utility companies in North America and continues to serve its customers with reliable, clean, and safe energy. The company operates in 3 regions including Canada, the United States, and the Caribbean countries.

Fortis operates in the highly regulated Canadian utility sector, and 99% of the company's earnings come from regulated utilities.

But, you might be confused here. What exactly is a regulated utility?

A regulated utility company is one that has complete control. They own the meter box, the power poles, the cables, and even the power generation facilities. As such, there is little room for competition. In fact, you could consider regulated utilities to be a legal monopoly. However, it is a monopoly that has benefits for both the business and the consumer.

Fortis organizes rates with the municipality, rates that lead to reasonable prices for consumers, but most importantly guaranteed profits for the supplier. This is one of the primary reasons the company's earnings are so predictable.

In fact, I own the company and haven't had to look at a quarterly report from Fortis in what seems like forever. Fortis is a staple in most Canadian dividend investor portfolios, and for good reason. It has raised dividends for 48 straight years, with an inevitable 49th coming up. There is no doubt in my mind that Fortis will hit Dividend King status, which is 50 straight years of growth.

This makes it one of the most reliable companies in the country, and now has a dividend yield in the mid 3% range. The company targets 6% dividend growth and has achieved this mark for the last 3 years. In fact, in recent years, the company has managed to exceed that and increase its dividend by 6.7% annually.

Overall, I believe this is hands down the best Canadian utility stock to own in the country today and maybe for the foreseeable future. In terms of valuation, this company has never really been "cheap". You're paying a premium for strong and reliable dividends.

This truly is a "buy at any time" type stock that you can tuck away in your portfolio, even in a rising rate environment.

Algonquin Power and Utilities (TSE:AQN)

Algonquin Power (TSX:AQN) is a power generation and distribution company. The company provides generation, transmission, and distribution services including natural gas, water, and electricity to over 1 million customers in the United States and Canada.

Algonquin is one of the fastest-growing Canadian utility stocks, managing to consistently raise earnings by double digits, and increasing its dividend. If you're looking for a renewable energy play, Algonquin for us is the clear-cut winner.

The Texas storms unfortunately put a damper on what would have been a very solid year for Algonquin in 2021. This caused the stock price to lag and ultimately, it took a while to recover. But throughout 2022 it has done so as sentiment has returned to the renewable energy industry and the company is growing its assets and getting back on track.

So much so that analysts figure the company will be able to grow the top line by nearly 20% in 2022 and earnings by just over 6%.

Now, I know mid-single-digit earnings growth doesn't sound that flashy. However, you won't find a Canadian utility with this high of growth expectations unless you venture into small/micro caps, especially one that offers a dividend as lucrative as Algonquin does.

At the time of writing the company yields in the mid 4% range and has a payout ratio in terms of earnings of around 119%. This payout ratio may look dangerous. However, it's important to understand that this is on a TTM (trailing twelve months) basis, which includes some impacts to earnings in 2021. If the company can generate expected earnings of $0.95, its annual dividend of $0.872 is covered.

Price-wise, the stock is starting to recover after a very poor 2021. But despite this increase, Algonquin is still trading well below its 3, 5, and 10-year median averages when it comes to forward price to earnings.

Another benefit of the company? It pays its dividend in USD. Prior to COVID-19, this was an even bigger benefit. But, as we are seeing the USD shrink and CAD rise, it's still attractive, but not as much. Keep in mind, when you look at Algonquin's ticker on the TSX, its forward annual dividend rate will typically already be converted to CAD.

Algonquin has been another utility company here in Canada that has consistently outperformed the index. We expect this to continue.

Hydro One (TSE:H)

Hydro One (TSX:H) is an electric utility company that primarily operates in Ontario Canada. The company serves over 1.5 million residential and business customers across the province.

The stock is backed heavily by the provincial Government and Hydro One's generation methods are as such that it is extremely hard for others to replicate, making barriers to entry extremely high.

We like stocks with economic and competitive moats, and Hydro One offers just that. The higher barriers to entry, the lesser chance the company stands to lose market share. In the end holding market share leads to reliable revenue, and a reliable dividend.

The company pays a respectable 3%~ yield, and unlike most other utility companies who are paying out more than 75% of earnings towards the dividend, Hydro One comes in at just 65% of its trailing twelve months earnings.

Keep in mind that the company became a Canadian Dividend Aristocrat last year, which signals 5+ years of consecutive dividend growth. It's important to note that Hydro One launched its IPO in 2015, so the dividend streak is pretty impressive.

Since the company's IPO, the stock has provided a compound annual growth rate of 6.77% to investors. This isn't necessarily world-beating, but once you reinvest the dividends received the company has returned 10.69% annually since late 2015. This is one of the more impressive returns in the utility sector.

Hydro One isn't going to post exceptional returns, but it is going to give you a strong dividend with a ton of room for growth, and I like that in a utility company.

Overall, Canadian utility stocks are a great sector to build a core portfolio around

The regulated nature of the utility sector makes them outstanding investments during practically any economic circumstances. Yes, there are plenty of other options for Canadians to choose from like Canadian Utilities Ltd (TSE:CU), Atco Energy (TSE:ACO.X), or even Emera (TSE:EMA), but this should at least give you a head start on your search in finding the best utility company that fits with your portfolio and risk tolerance.

I believe every portfolio should have a couple of these stocks, additions to what I call the "foundation" portion of your portfolio. Those stocks you simply set and forget. In environments like this, you want to own businesses that have zero chance of shutting down. Think of stocks like Fortis, Dollarama, or even grocery store stocks like Loblaws.

I've owned Fortis for a decade now, and there is nothing better than having a stock sitting in your portfolio paying you reliable dividends with little effort on your part, even when the stock markets get rough. These aren't going to be world-beater in terms of total returns or growth potential, but we can reserve that for other portions of our portfolio.

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post.

Dan Kent

About the author

An active dividend and growth investor, Dan has been involved with the website since its inception. He is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. He has completed the Canadian Securities Course, manages his TFSA, RRSPs and a LIRA at Qtrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.