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

Posted on November 17, 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.

Typically, the best 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 are often outstanding dividend stocks

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.

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.

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

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 fine.

With that said, let's get to Canada's top utility companies on the Toronto Stock Exchange 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)
  • Northland Power (TSE:NPI)
  • Hydro One (TSE:H)

Fortis (TSE:FTS)

A Canadian utility stock list wouldn't be the same without Fortis (TSX:FTS). Of note, the company is dual-listed, meaning it trades on both the TSX and the New York Stock Exchange (NYSE).

The large-cap 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. They have the sole ability to supply consumers with electrical power.

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, paying an annual dividend of $2.26. 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.

Northland Power (TSE:NPI)

Because of its struggles in 2022, we have replaced Algonquin Power and Utilities with Northland Power on this list of top utility companies. For those looking to gain exposure to the renewable energy sector, Northland is an outstanding pure-play option.

Northland Power develops, constructs, and operates maintainable infrastructure assets across a range of clean and green technologies, such as wind (offshore and onshore), solar, and supplying energy through a regulated utility.

Offshore wind is expected to remain the company's largest segment over the long term. Northland’s growth opportunities are global and 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. Rising rates in 2022 has put pressure on utility companies, and for this reason Northland Power at the time of writing 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 a consistent monthly basis and has an attractive yield in the 3% range that many utility investors will demand, its dividend hasn't grown much at all over the last 5 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, it is likely the company will start to increase its dividend payouts in Fiscal 2023 and beyond, and dividend investors can soak up this monthly 3%~ yield while they wait.

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 63% 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 7.94% to investors. This isn't necessarily world-beating, but once you reinvest the dividends received the company has returned 11.81% 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.

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