Utility Stocks During a Recession Are Safer Havens: 2 Stocks for Your TFSA

A private equity firm increased its stake in Tidewater Midstream and Infrastructure Ltd (TSX:TWM). Is it better to buy this small cap or bundle utility stocks?

Investing within a tax-free saving account (TFSA) is a great way to build wealth. The first steps involve saving money and creating a TFSA account. As years pass, prudent investing will produce capital that can buy a trip around the world, pay for a home reno, or live off during retirement as non-taxable income.

Utility stocks have fallen out of favour, but are typically good investments in the long run. Here are two completely different strategies.

First up is Tidewater Midstream and Infrastructure Ltd. (TSX: TWM), which caught my eye on the news of a massive shareholder handover.

It can be difficult to get analyst content on small cap stocks, and Tidewater is no different. It’s therefore a good thing that Fool contributor Kay Ng already dug down a rabbit hole to find out more about this $487 million market cap utility company that operates in the natural gas liquids energy business.

With an enterprise value of $729 million and EBITDA of $51 million for the last 12 months, the ratio gives 14, which is within a range that gets value investors excited. Tidewater forecasts this low ratio will continue to beat peer-average (read: competitors) according to the September corporate presentation notes.

But wait: there’s more news!

Earlier this week, a Toronto-based private equity firm, Birch Hill Equity Partners Management Inc., announced that it would purchase $63 million in Tidewater shares off of a multi-national energy giant AltaGas Ltd. This bulk trade is said to cost Birch Hill $1.45 per share and is expected to close on September 28, 2018.

Did I mention that Birch Hill is already in for 9.1% of Tidewater’s common shares? The new purchase will take Birch Hill’s stake to 22% of the company (read: confidence).

Tidewater’s share price is the range of between a buck + a quarter and a buck + fifty cents. In three out of the last 12 quarters, the earnings have been zero, but otherwise positive. Will the tide (ahem) turn for Tidewater? There’s enough upside to keep Tidewater on your watch list.

Buy a basket with a big yield

A second utility investing strategy is to buy a basket of recognizable utility companies that pay dividends. Live off the income if you can! BMO offers an exchanged-traded fund (ETF) that is worth a look. Compared to many high yielding ETFs, the BMO Covered Call Utilities ETF (TSX: ZWU) gets an extra income lift by using options trading. The yield comes mostly from dividends paid from the underlying holdings. Selling covered calls generates a bit more.

If you’re like me and don’t have the time or inclination to learn to trade options successfully, then this is a brilliant way to get in on options action. Leave it to the BMO experts who strategically sell bits of the assets within the $700 million portfolio.

Holding ZWU and doing absolutely nothing would double your initial investment in 11 years from the 6.5% yield alone (assuming the yield doesn’t change). That would be a tax-free doubling if held in an TFSA.

Takeaway

Tidewater trades below the 2015 initial public offering of $2.20 per share. It is a higher risk compared to the ZWU ETF, but also offers a higher potential reward. Either of these utility strategies could make a TFSA swell over time.

Fool contributor Brad Macintosh has no position in any of the stocks mentioned.

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