Utility Stocks Are Still a Great Bet for Those Seeking Income

Even in a rising interest rate environment, utilities such as Fortis Inc. (TSX:FTS)(NYSE:FTS) and Hydro One Ltd. (TSX:H) are still fantastic vehicles for income.

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Two interest rate hikes by the Bank of Canada have tested utilities stocks. The 10-year yield on Canadian government bond prices reached a three-year high on September 22. The post-financial crisis environment has driven many income-driven investors to stocks.

One of the most attractive vehicles for income are utility stocks. Consistent dividend growth, a wide economic moat, and stability in the face of economic volatility make them a favourite for defensive portfolios. The potential for higher borrowing costs due to rising interest rates has put some downward pressure on Canadian utilities. However, there is still reason for optimism for those in search of the stable income utility stocks provide.

The Bank of Canada has emphasized the cautious approach it wants to take with future hikes, and, similar to the U.S. Federal Reserve, it promises to be a gradual process. With that in mind, as we head into the final months of 2017, let’s take a look at some of the best utility stocks available that could come at a bargain.

Canadian Utilities

The Calgary-based Canadian Utilities Limited (TSX:CU) has declined 6% as of close on September 26 since the first interest rate hike on July 12. It is down 1.5% since the second rate hike on September 6. This was in spite of solid second-quarter results released on July 27. Adjusted earnings were up to $135 million from $131 million in Q2 2016. The company announced a 10% dividend hike from the previous year to $0.36 per share, representing a dividend yield of 3.7%. It has reported dividend growth for over 40 years.

Shares have increased 5.8% in 2017 and 2.8% year over year. Like the other utilities covered in this article, if the Bank of Canada decides to forgo a third rate hike in October, the stock could be in for a late-year boost.

Fortis

Fortis Inc. (TSX:FTS)(NYSE:FTS) was largely flat after the first rate hike in July but has declined 2.5% since the second rate hike on September 6. The company has also reported over 40 years of dividend growth. Its second-quarter results released on July 28 showed net earnings increase to $257 million from $107 million in Q2 2016.

The stock has still experienced growth of 7% in 2017 and 4.8% year over year. Income investors should be satisfied with the 40-year dividend-growth streak as well as the dividend yield of 3.6%.

Hydro One

Shares of Hydro One Ltd. (TSX:H) were also static after the first interest rate hike and rose on the news of the Avista Corp. acquisition. However, the stock has dropped 1% after the second rate hike. Second-quarter results released on August 8 saw earnings down due to external factors. The quarterly dividend still increased 5%. Hundreds of thousands of U.S. consumers will add to revenues when the Avista deal closes in 2018.

The stock has declined 3.6% in 2017 and 13% year over year. The dividend of $0.22 per share with a dividend yield of 3.9% should see consistent growth with Hydro One’s significant moat. I still think this stock is a bargain.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any stocks mentioned.

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