Best Canadian Utility Stocks: Income + Growth

Best Canadian Utility Stocks: Income + Growth

Utility companies play a significant role in our day to day life. They are in fact the equivalent to the blood in our veins when it comes to our world’s infrastructure. Take the power down and not much works and we are in the dark ages. As a business, there is nothing more stable in our world than utilities.

As an investors, it can get confusing to find the appropriate utility stock for your portfolio. It’s understandable as it could be confusing finding the one that fits your portfolio.

Should you pick the largest by market capitalization? Should you pick the highest yield utility? How about the one with the best consistent dividend growth?

Overall, utility stocks will provide a good dividend and if you can DRIP, you will be able to compound your holdings at a good rate. Be aware that while utility stocks pay a good dividend, they are sensitive to the interest rates.

They are a proxy to income for many investors. Utility stocks have a place in a portfolio and more so in a retirement portfolio when investing for income. See below for a list of dividend paying utility stocks.

I caution investors about falling in love with utilities. While they provide a good dividend income and have seen good stock appreciation in the recent years, they are not growth stocks. Just like the telecoms, they are regulated and growth usually come from acquisitions or from venturing in other businesses.

As an example, telecom companies started owning TV channels and created Crave TV. In the case of Telus, it ventured in the healthcare data services and Brookfield Infrastructure started investing in data centers.

I did a survey with readers and the results are shared at the end of the post.

Top 3 Utility Dividend Stocks

My approach to valuing dividend stocks is heavily biased towards the Chowder Score which takes into account the consistency of the dividend increases and the dividend growth. Below are the top picks for a solid investment.

For valuation of utility stocks, it’s important you review the free cash flow (not displayed below) as it is better than looking at earnings. It would be nice if we could evaluate all business the same way but we cannot. REITs and income trusts are evaluated through funds from operations and some capital intensive companies are better evaluated with free cash flow.

Utilities are interest sensitive stocks, keep that in mind when building your portfolio. The flock has already bought the utilities throughout 2019 and 2020 due to low interest rates and therefore driving the prices to their 52-week high.

1. Algonquin Power & Utilities Corp

Algonquin Power & Utilities is a diversified utility company in North America with $10 billion in total assets. The company engages in the generation, transmission, and distribution of water, gas, and electricity to communities across the U.S. 

As a growing renewable energy company, Algonquin Power owns a strong portfolio of long term contracted wind, solar and hydroelectric assets with 1.5 GW of total installed capacity.

The company has more than 50 power generation facilities and 20 utilities across North America. Algonquin’s utility business serves nearly 770,000 customers in twelve states across the U.S., through 1,200 miles of electrical transmission lines and 100 miles of natural gas transmission pipelines.

Key Investment Data

2. Fortis

Fortis is a leading utility company engaging in regulated power generation, electric transmission, and energy distribution across North America.

The US accounts for about 60% of Fortis’ business while Canada constitutes the remaining 40%. About 99% of the company’s utility assets are regulated and it operates through regulated independent electric transmission (32% of 2018 earnings), regulated US electric & gas (33%), regulated Canadian & Caribbean electric & gas (40%), and non-regulated energy infrastructure (-5%) business segments.

Fortis’ assets can be divided into electric (~80% of asset mix), gas, and non-regulated energy infrastructure. It operates through 10 utility companies such as ITC, UNS Energy, Fortis Alberta, Fortis BC, etc. and serves utility customers in five Canadian provinces, nine U.S. states and three Caribbean countries.

Key Investment Data

3. Emera

Emera Inc. is a leading North American diversified energy and services company with assets worth $30 billion. The company engages in the generation, transmission, and distribution of electricity and gas, and provides other utility energy services. It also has investments in renewable energy assets.

Emera Inc. has operations in Canada, the USA and in four Caribbean countries. The company serves a diverse base of residential, commercial as well as industrial customers.

It operates a balanced and diversified portfolio consisting of ~90% regulated assets in electric utilities, gas LDCs; and unregulated gas-fired generation across North America. Emera reports its results in six operating segments: Emera Florida and New Mexico, Nova Scotia Power Inc., Emera Maine, Emera Caribbean, Emera Energy, and corporate & other.

Key Investment Data

Reader Interest in Utility Stocks

I did a survey to see what the interest in utility stock generally is. See below for the results.

The following chart shows the ownership of each stock by the investors surveyed. As you can see, over 50% of investors have Fortis and Algonquin Power & Utilities Corp.

The following graph shows the stocks of most interest by investors surveys. It’s the next utility they are interested in.

The following graph shows how many utility stocks investors generally hold in their portfolio.

Published at Tue, 08 Mar 2022 14:22:00 -0800