Canadian utility stocks are often a staple in Canadian investment portfolios, for a number of reasons.
So why do Canadians buy these stocks?
They provide stability. Canadian utility stocks operate in a highly regulated environment, one that provides consistent revenues that lead to less surprises. In the end, this lowers the overall volatility of Canadian utility stocks.
Secondly, 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 a high potential growth stock.
Don’t get me wrong, there are plenty of Canadian stocks in the utility sector that provide growth, primarily with renewable energy. So, if you’ve come looking for more of a growth option, just head to that link, you’ll be presented with some great utility companies that focus on cleaner forms of energy. In fact, one of them is on both of these lists!
On the other hand, 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.
With that said, lets get to Canada’s top utility companies to look at in 2020. Keep in mind, these companies are in no particular order, and each provide a unique investment opportunity for Canadians.
Canada’s Best Utility Companies to Buy in 2020 And Beyond
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.
They operate in the highly regulated Canadian utility sector, and 99% of the company’s earnings come from regulated utilities.
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 generation methods. 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 reasonable rates with the municipality. One that leads to reasonable rates 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 46 straight years, with an inevitable 47th coming up soon. This makes it one of the best Canadian Dividend Aristocrats, and now sits at a very respectable 3.64% dividend yield. The company targets 6% dividend growth, and has achieved this mark for the last 3 years. In fact, over the last decade the company has increased its dividend by 8.6% annually.
Overall, I believe this is hands down the best Canadian utility stock to own in the country today, and may be 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.
On a dividend adjusted basis, the utility company has crushed the overall returns of the TSX. Lets take a look:
FTS 5 Year Dividend Adjusted Performance vs the TSX
Algonquin Power and Utilities (TSX: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 800,000 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.
Analysts expect the company to grow its top line by more than 12% this year and a whopping 26.1% in 2021. 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 4.50% range and has a payout ratio in terms of earnings of around 105%.
This may spook some investors, but don’t worry. Algonquin has managed to raise dividends for nearly a decade straight with similar payout ratios.
The company is planning some impressive growth ahead. Algonquin plans to rapidly expand its renewable energy and pipeline projects, and this is a primary reason why most Canadian utility ETF’s have Algonquin as a top 5 holding.
Price wise the stock has struggled as of late, and we’re not sure why. The company is currently trading at an 8% discount to its 5 year historical forward price to earnings, and a 48% discount to its 5 year trailing price to earnings.
Another big benefit of the company? It pays its dividend in USD. Depending on exchange rates, this can be a huge benefit to Canadian investors. 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. By how much? Lets have a look:
AQN 5 Year Dividend Adjusted Performance vs the TSX
Hydro One (TSX:H)
Hydro One (TSX:H) is an electric utility company that primarily operates in Ontario Canada. The company serves over 1.4 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 3.69%, and unlike most other utility companies who are paying out more than 70% of earnings towards the dividend, Hydro One comes in at just 32% of its trailing twelve months earnings. Keep in mind that the company is not quite a Canadian Dividend Aristocrat, as it has only raised dividends for four consecutive years.
However, its important to note that Hydro One launched the IPO in 2015, so the dividend streak is pretty impressive. Since the company’s IPO, it has provided a compound annual growth rate of 3.85%. Which, isn’t necessarily world beating, but including dividends as you’ll see below, it’s still outperforming the Index over the last half decade.
Analysts expected mid single digit revenue growth over the next few years, and have a 1 year price target in the low $30 range for the company. 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.
H 5 Year Dividend Adjusted Performance vs the TSX
Overall, Canadian Utility Stocks are a Great Industry to Build a Portfolio With
The Canadian utility industry is set to prosper from interest rate drops due to COVID-19. When will interest rates return to normal? Nobody really knows, but it’s safe to say it won’t be for the next few years. As a result, these utility companies will be able to borrow for cheaper, and thus expand for cheaper.
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 sit in your portfolio and pay you reliable dividends with little effort on your part.