The Motley Fool

Why TSX Utility Stocks Outperformed in the Recent Market Weakness

Image source: Getty Images

While almost the entire stock market turned weak, defensive stocks like utilities notably outperformed this month. TSX stocks at large fell by nearly 5%, but utility stocks soared by 5%. Top gainer stock Shopify has lost more than 20% in September. So, why did some of the strongest names turn pale and boring stocks outperform in the recent broad market weakness?

Recession-resilient business

Utility stocks are usually called “widow-and-orphan” stocks due to their stable dividends and slow stock movements. Due to their highly regulated operations, they earn a stable rate of return and stable cash flows. And that’s exactly why they are more prone to pay stable dividends.

When broader markets turn rough, investors flee to unwavering sectors in order to protect the principal. Thus, utilities are generally their preferred choice in uncertain times.

Canada’s top utility Fortis (TSX:FTS)(NYSE:FTS) soared more than 2% in September. It yields nearly 4%, higher than the broader markets. Along with yield, Fortis’s dividend-payment history of 46 consecutive years is calming for investors.

Also, its dividend-growth rate for the next few years is expected to comfortably beat inflation — another plus for long-term investors. Fortis has returned almost 10% compounded annually in the last decade.

Lower correlation with economic or business cycles

Additionally, utility stocks have a much lower correlation with broader markets than high-growth tech stocks. That’s why they generally outperform when markets trade lower. Similarly, tech stocks generally outperform defensives when markets rally.

Thus, diversification plays an important role, and utilities should have at least some exposure in your long-term portfolio.

Consider Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN). This is one of the fastest-growing utilities and operates renewables assets as well. It generates a large portion of its earnings from regulated operations, which enables dividends stability.

It will pay $0.82 per share in dividends and yields 4.5%. Notably, Algonquin Power has returned more than 20% compounded annually in the last 10 years.

Low interest rates and utility stocks

The current environment of lower interest rates is particularly favourable for utilities. As they carry large amounts of debt, lower interest rates reduce their debt-servicing costs, which ultimately boosts profitability. Also, income-seeking investors switch to utilities amid falling interest rates in search of higher yields. This further gives a lift to utility stocks.

Canadian Utilities (TSX:CU) was an exception in the industry this month. The stock trended lower along with broader markets and lost 5% so far this month. It yields 5.5% at the moment, the highest among peers.

It has managed to increase dividends for the last 48 consecutive years — one of the longest dividend-increase streaks in Canada. CU stock returned 6.5% compounded annually in the last decade.

Interestingly, utilities will most likely continue to pay such steadily growing dividends for years to come. Their stable businesses and predictable earnings should fuel inflation-beating dividends.

Although they might not generate jazzy returns in the short term, stable dividend payments will protect your portfolio from the broad market volatility.

Where should you invest $1,000 today?

Motley Fool Canada Makes 5G Buy Alert

5G is one of the greatest arrivals in technology since the birth of the internet. We could see plenty of new wealth-building opportunities in 2020 that would potentially dwarf any that came before them.

5G has the potential to radically change our lives and society as we know it, but if you’re an investor, the implications are even greater — and potentially much more lucrative.

To learn more about it and its revolutionary potential to change the industry — and potentially your bank account — click on the link below to get the full scoop.

Learn More Today!

Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify. The Motley Fool recommends FORTIS INC.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.