What’s up guys, it’s wiz.
Welcome back to the channel. If you are new, I am a Canadian investor. I cover a whole lot of information about investing in Canada and do research into our Canadian market. I dive into growth investing, dividend investing and Canadian small caps / penny stocks. Today, I will be going over Canadian utility stocks. I wanted to showcase some of the top picks for this sector, we will also be talking about the dividends each company offers. For new investors, you need to join Wealthsimple Trade if you are looking to start investing and live in Canada. If you use my link in the description to join Wealthsimple, you get 2 free stocks worth up to 4500$ so do not miss out.
Canadian utility stocks are considered a staple in Canadian investment portfolios. They provide stability. I have mentioned this a number of times before, Canadian utility stocks operate in a highly regulated environment, one that provides consistent revenues that lead to fewer losses. In the end, this lowers the overall volatility of Canadian utility stocks. Canadian utility stocks also often provide excellent dividends. Most of these companies are established and are considered pillars in the industry. As such, they are able to reward shareholders in the form of high and consistent dividends. Utility companies are in an excellent position to outperform over the long term, and these companies should have a place in every Canadian’s portfolio. Utility companies primarily deal with things like electric transmission, electricity generation, and energy infrastructure. For this reason, their cash flow is considered extremely reliable. As a result, utility stocks will more than likely form the core of many investors’ portfolios. When times get hard and the market gets volatile, they’ve proven to be capable of resisting market turbulence. So, let’s get to Canada’s top utility companies to look at in 2022. Keep in mind, these companies are in no particular order, and each provides a great investment opportunity for Canadians.
Let’s start off with Fortis (ticker symbol 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 countries. Fortis operates in the highly regulated Canadian utility sector, and 99% of the company’s earnings come from regulated utilities. 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. 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. 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 dividend growth. This makes it one of the most reliable companies in the country, and now has a dividend yield in the mid 3% range. 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. Great Canadian stock to consider if you haven’t already.
Next, let’s talk about Algonquin Power and Utilities (ticker symbol AQN). Algonquin is a power generation and distribution company. The company provides generation, transmission, and distribution services including natural gas, water, and electricity to over 1 million 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 is a clear winner. The Texas storms unfortunately put a damper on what would have been a very solid year for Algonquin in 2021. This caused the stock price to lag and ultimately, it took a while to recover. But throughout 2022 it has done so as sentiment has returned to the renewable energy industry and the company is growing its assets and getting back on track. So much so that analysts figure the company will be able to grow the top line by nearly 20% in 2022 and earnings by just over 6%. Now, I know mid-single-digit earnings growth doesn’t sound that flashy. However, 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 good as Algonquin does. The company currently yields in the mid 4% range and has a payout ratio in terms of earnings of around 119%. This payout ratio may look dangerous. However, it’s important to understand that this is on a TTM (trailing twelve months) basis, which includes some impacts to earnings in 2021. If the company can generate expected earnings of $0.95, its annual dividend of $0.872 is covered and safe. Price-wise, the stock is starting to recover after a very poor 2021. But despite this increase, Algonquin is still trading well below its 3, 5, and 10-year median averages when it comes to forward price to earnings. Algonquin has been another utility company here in Canada that has consistently outperformed the index. Great Canadian company to consider.
Final company I will talk about is Hydro One (ticker symbol H). Hydro One 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 such that it is extremely hard for others to replicate, making barriers to entry extremely high. 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 65% 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 6.77% to investors. This isn’t necessarily world-beating, but once you reinvest the dividends received the company has returned 10.69% 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. Yes, there are plenty of other options for Canadians to choose from like Canadian Utilities (ticker symbol CU), but of course can’t go over them all, hope everyone understands that. Hope you guys enjoyed these Canadian utility stocks. Please watch my previous videos on Canadian stock recommendations and let me know of any Canadian stocks you want me to look into and give my opinion on. Let me know in the comments, since I really want to expand my knowledge in the Canadian market, and you also expand your own knowledge by asking questions. If you did enjoy this video, leaving a like really helps grow the channel! Thanks for watching, I’ll see you guys in the next video!