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

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

Secondly, Canadian utility stocks are often outstanding dividend stocks

These companies are established and have solid roots implanted in the industry. As such, they can reward shareholders in dividends, at least more so than high-potential growth stocks.

Don't get me wrong; plenty of Canadian stocks in the utility sector 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.

Are Canadian utility stocks a good investment?

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

Well, everyone needs electricity. 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 capable of weathering the storm. And as such, we'd view them as great investments in any economic circumstances.

There is one thing to know about most utilities, and that is the fact that they typically carry a lot of debt on the balance sheet. As a result, financial results can be put under pressure during rising interest rates.

However, as with many companies on the stock market, returns are made over the long term, and if you buy a strong utility company, it will come out of the situation just fine.

Are there strong Canadian utilities ETFs?

Right now, there are two primary ETFs when it comes to Canadian utilities. The iShares S&P/TSX Capped Utilities Index ETF (TSE:XUT) and the BMO Equal Weight Utilities Index ETF (TSE:ZUT).

BMO does have a covered call variant that utilizes a call option strategy to push out more income for its holders. This ETF trades under the ticker ZWU. Its performance has been relatively poor over the years, and I feel that utilities provide more than enough income for investors that they shouldn't need to seek out added strategies that limit the upside.

Are Canadian utility stocks without risk?

For the most part, investors get a little bit too comfortable when selecting a utility company for their portfolio. Look no further than utility stock Algonquin Power (TSE:AQN). Despite 70%~ of its business being regulated utilities, the company's over-exposure to floating rate debt and extensive acquisition strategy caught up to it in 2022.

With the Bank of Canada and the Fed stating that rates would stay low for the foreseeable future, this was difficult to predict. However, with the change in direction from policymakers and the fastest increase in rates in history, Algonquin was forced to cut the dividend and refocus on strengthening its balance sheet.

This shows that even reliable, cash flow-generating assets like regulated utilities are not without risk.

Let's get to Canada's top utility companies on the Toronto Stock Exchange in 2023. Remember that these companies are in no particular order, and each provides a unique investment opportunity for Canadians.

What are the best utility stocks in Canada?

• Fortis (TSE:FTS)
• Northland Power (TSE:NPI)
• Hydro One (TSE:H)
• Emera (TSE:EMA)

Fortis (TSE:FTS)

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 has complete control. They own the meter box, the power poles, the cables, and power generation facilities. They have the sole ability to supply consumers with electrical power.

As such, there is little room for competition. You could consider regulated utilities to be a legal monopoly. However, it is a monopoly that benefits both the business and the consumer.

Fortis organizes rates with the municipality, which 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.

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 49 straight years, with an inevitable 50th coming up. I do not doubt 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 it now has a dividend yield in the low 4% range, paying an annual dividend of $2.26. The company targets 6% dividend growth and has achieved this mark for the last three years. In fact, in recent years, the company has managed to exceed that and increase its dividend by 6.7% annually.

Considering rate hikes, it will likely struggle to hit the higher end of its guidance. However, I have little doubt it will be one of the better-regulated utilities regarding dividend growth over the next half-decade.

Overall, I believe this is hands down the best Canadian utility stock to own 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 is a "buy at any time" type of stock you can tuck away in your portfolio, even in a rising-rate environment.

Northland Power (TSE:NPI)

Offshore wind will remain the company's largest segment over the long term. Northland's global growth opportunities span North America, Europe, Latin America, and Asia.

The company has performed exceptionally well over the last few years, considering the large renewable energy selloff in 2021 and 2022. However, in 2023 it has struggled. Rising rates have put pressure on utility companies. For this reason, at the time of writing, Northland Power is trading at a large double-digit discount to its historical valuations on a P/E ratio and free cash flow basis.

Where the company struggles is with its dividend growth. Although it pays consistently monthly and has an attractive yield in the mid-4% range, its dividend hasn't grown much over the last five years.

Considering the company's payout ratio in terms of operating cash flow is only 14%, and the dividend makes up only 30% of earnings, it is somewhat puzzling why Northland Power hasn't been able to at least increase the dividend on an annual basis.

However, the company will likely start to increase its dividend payouts in Fiscal 2023 and beyond, and dividend investors can soak up this monthly 4%~ yield while they wait.

Hydro One (TSE:H)

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 dividends.

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

Remember 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 investors a compound annual growth rate of 7.34%. This isn't necessarily world-beating, but once you reinvest the dividends received, the company has returned 11.45% 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 will give you a strong dividend with a ton of room for growth, and I like that in a utility company.

Emera (TSE:EMA)

So although it's not as large as a company like Fortis, it is still a utility leader here in Canada with strong US exposure.

The company yields in the low 5% range and has raised dividends for 16 consecutive years. Like many other utilities, it won't blow you away with exceptional dividend growth. However, it's been able to consistently grow the dividend at a mid-single-digit pace for quite some time now.

With the company paying out only 44% of trailing twelve-month earnings, we will likely see this dividend growth rate also continue.

Emera hasn't returned as much as a higher growth utility like Hydro One over the last half-decade. However, it has still managed near double-digit annualized returns since 2018.

This is certainly one you could have a peek at for those looking for exposure to an electric utility in Atlanta, Canada, and Florida.

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.