Canada’s Best Utility Stocks to Buy for December 2024
With interest rates declining, many utilities are nearing 52-week highs after multi-year slumps. Although one could say the best time to buy the top Canadian utility stocks was when rates were at their peaks and prices were nearing 52-week lows, there is certainly still opportunity here.
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, an element that is overlooked when it comes to an investment portfolio.
Lets go over some of the best utility stocks in Canada today. Keep in mind, these stocks are in no particular order.
Of note, if you’d like to view our in-depth research on each company, simply click the links in the table below or keep scrolling.
What are the best utility stocks in Canada?
- Fortis (TSE:FTS)
- Capital power (TSE:CPX)
- Hydro One (TSE:H)
- Brookfield Renewables (TSE:BEP.UN)
Fortis (TSE:FTS)
A Canadian utility stock list wouldn’t be the same without Fortis (TSX:FTS). The company is dual-listed, meaning it trades on the TSX and the New York Stock Exchange (NYSE).
The large-cap company is one of North America’s top 15 utility companies and continues to serve its customers with reliable, clean, and safe energy. The company operates in 3 regions: Canada, the United States, and the Caribbean.
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 50 straight years, with an inevitable 51st coming up. Fortis become the second company (the other being Canadian Utilities) to reach Dividend King status, which is 50+ years of consecutive dividend growth.
This makes it one of the most reliable companies in the country, and it now has a dividend yield in the high 3% range, paying an annual dividend of $2.36. The company targets 4%-6% dividend growth and has achieved this mark for the last three years.
Considering that rates are coming down but still high, it will likely struggle to hit the higher end of its dividend growth guidance. However, I have little doubt it will be one of the better-regulated utilities regarding dividend growth over the next half-decade.
The company is aggressively investing back into the business, with plans to spend over $25B on infrastructure over the next half decade to improve its rate base and ultimately drive more earnings growth from its regulated utilities. Not only will this provide consistent and reliable earnings growth, but should allow the company to continue to grow the dividend at a mid-to-high single digit pace as well.
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 if we don’t get back to the low rate environment we witnessed pre-pandemic.
Capital power (TSE:CPX)
Capital Power (TSE:CPX) is a diversified utility, utilizing a portfolio of natural gas, coal, wind, solar, and solid fuel energy generating facilities.
The company’s Canadian exposure is primarily situated in Western and Central Canada, along with exposure in the United States. The company primarily generates its revenue from the sales of electricity and natural gas.
The company is currently undergoing a large transition to diversify away from coal generated power to renewables and natural gas. The company’s Genesee Generation Station in Alberta finished its coal to natural gas transition 5 years ahead of its original targets, a significant achievement and one that eased a lot of investors minds on the difficulty of the overall transition.
The company is aggressively investing in solar projects as well, with two major projects, Hornet Solar and Bear Branch Solar, expected to come online in 2026.
The company is arguably one of the cheapest utilities in the country. Despite having one of the strongest balance sheets in the industry, investors seem hesitant to invest in the company. This is likely to bode well for patient investors, as they can accumulate shares at discounted prices.
The company pays an attractive yield, often north of 6%. This is one of the best yields in the entire sector, and the dividend is well covered, often making up less than 50% of earnings.
Its continued transition to greener forms of energy should fuel continued earnings and dividend growth, and continued declining rates should result in multiple expansion on a valuation basis.
Hydro One (TSE:H)
Hydro One (TSX:H) is an electric utility company 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 tough 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 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.
The company became a Canadian Dividend Aristocrat in 2021, which signals 5+ years of consecutive dividend growth. Fast forward to now, and the company is on a 8 year dividend growth streak.
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 12.44%. This outperforms the TSX Index by a wide margin, and is trailing the S&P 500 by just 1% annualized. Not bad for a defensive utility.
Brookfield Renewables (TSE:BEP.UN)
Brookfield Renewables (TSE:BEP.UN) is the largest renewable energy company on the planet. The company’s portfolio includes a wide variety of renewable energy assets, such as hydroelectric, solar, wind, and storage.
Renewable energy companies have been under a microscope over the last few years. A pandemic-driven euphoria among the transition to greener energy and simply overall market speculation drove Brookfield’s share price up, and it did so in rapid fashion.
This may lead investors looking at a chart of Brookfield Renewables to believe it is a weak company. However, this is a company that is expanding at a rapid pace, locking down contracts that no other utility player on the planet can handle, and driving strong Funds From Operations growth despite some relatively rough circumstances.
The vast majority of the company’s debt is fixed rate, which has allowed it to navigate the higher rate environment relatively efficiently. It targets anywhere from 9%-15% FFO growth, and although it is currently achieving numbers near the bottom end of its targets, the fact it is able to hit this level of growth in the current rate environment is a testament to the quality of the company.
The company aims to deliver mid-to-high single digit dividend growth, and has raised the dividend for 14 consecutive years
Brookfield’s size should allow it to take advantage of numerous corporations that are looking to become carbon-neutral or even carbon-negative in the future. A prime example of this would be its agreement in 2024 with Microsoft, marking the largest corporate clean power purchase deal ever signed. Under this agreement, Brookfield will provide over 10.5 gigawatts (GW) of renewable energy capacity across the United States and Europe.
Renewables are more volatile than regulated utilities like Fortis, primarily because many of them are in the growth phase of their operations. In addition to this, political uncertainty is always higher in the renewable sector, as parties tend to have a different viewpoint on the overall transition to green energy.
However, one thing is for certain, and that is the fact that there will be a continued shift to renewable means of power generation in the future as the human population continues to grow.
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 list is a good starting point.
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 periods of high 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 2024. Remember that these companies are in no particular order, and each provides a unique investment opportunity for Canadians.
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 more than 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.