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

Posted on January 13, 2022 by Dan Kent

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, 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 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.

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. But it will take many subsequent hikes to get back to even pre-pandemic rates.

With that said, lets get to Canada's top utility companies to look at in 2021. 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 2021 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.

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 power 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 47 straight years, with an inevitable 48th coming up.

This makes it one of the best Canadian Dividend Aristocrats, and now sits at a very respectable 3.68% 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 6.7% 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.

Rising rates rumors are causing Fortis to trade relatively flat over 2021. But, this truly is a "buy at any time" type stock that you can tuck away in your portfolio.

On a dividend adjusted basis, the utility company has crushed the overall returns of the TSX. Lets take a look:

FTS 10 Year Performance vs the TSX

TSE:FTS 10 Year Return Vs TSX

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 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.

The Texas storms unfortunately put a damper on what would have been a very solid year for Algonquin. Now, analysts have revised their estimates to show shrinking earnings in 2021, primarily because of $55+ million in expected costs, whereas before this is a company that was expected to have double digit bottom line growth in 2021.

However, it will rebound next year, as they are predicting the company will grow its earnings by 15%.

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 4.02% range and has a payout ratio in terms of earnings of around 33%.

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, primarily due to the Texas storm impacts. Algonquin is trading well below its 3, 5 and 10 year median averages when it comes to price to earnings, both trailing and forward.

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. By how much? Lets have a look:

Alonquin 10 Year Performance vs the TSX

Hydro One (TSE: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 3.50%, and unlike most other utility companies who are paying out more than 70% of earnings towards the dividend, Hydro One comes in at just 33% of its trailing twelve months earnings.

Keep in mind that the company just became a Canadian Dividend Aristocrat, having hit 5 straight years of dividend growth.

It's 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 4.34%. 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.

Hydro One 10 Year 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.

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.