Should Investors Get Back Into Utility Stocks?

Utility stocks may be down, but I wouldn’t count them out yet — especially if you’re thinking long term.

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Investors often move into utility stocks in droves. And the reason is clear. Utilities provide safe, stable income from a variety of sources. They use the revenue to increase dividends and make acquisitions. This allows them to grow larger year after year.

It’s also why stocks with the longest dividend increases are in the utilities sector. Investors wanting dividends flocked to the sector, raising the share price far out of the normal range. Then when inflation and interest rates kept rising, utility stocks crashed.

What should investors do with utility stocks today? Should they buy more or stay away?

Think long term!

It can be tempting to invest in a sector because it’s doing really well. Utility stocks were no exception. Shares climbed higher, and they seemed like such a great opportunity! However, learn from the past. What soars up likely will come down.

While this doesn’t mean it will stay down, it certainly could for a little while. We’re expecting a recession in the first half of 2023, and utility stocks may continue to trade below fair value. However, that doesn’t mean you should stay out of this stable industry.

If you change your mindset to investing long term, it doesn’t matter when you buy. Whether it’s 10 years, 20 years, or 30 years from now, long-standing stocks will be around. Meanwhile, they’ll have grown far higher than you thought possible.

Here are the three I would consider today in this stable, long-term sector.

Canadian Utilities

Canadian Utilities (TSX:CU) is a no brainer. It’s the only Dividend King on the TSX today, with 50 years of consecutive dividend increases. That dividend is now at 4.82% as of writing and has risen by a compound annual growth rate (CAGR) of 7.2% in the last decade alone.

As for shares, this year was wild. After shares climbed by 17% between January and August, they crashed by 19% between then and October. Yet since the fall, shares are back up by 8.3%. Investors who see this for the opportunity it is and buy the company for a steal will do well holding long term.

Shares trade near value territory at 16.79 times earnings and 1.9 times book value. You can pick up this utility stock today and look forward to at least getting a deal while bringing in a rising dividend as well.

Fortis

Not far behind Canadian Utilities is Fortis (TSX:FTS). Fortis stock is almost at King status as well, making it the second-best dividend increaser on the TSX today. That dividend is now at 4.1% as of writing, rising by a CAGR of 6.9% over the last decade.

Shares saw a similar path in the last year, but perhaps it’s been less drastic than Canadian Utilities. Shares climbed 8.5% between January and May and started to fall with the rest of the market from there. The drop ended with shares down 24% between May and October, climbing up from there by 12% to where it is today.

Fortis stock isn’t as much of a deal trading at 20.18 times earnings and 1.34 times book value. However, if you want long-term income, you would do well to pick up this top performer that only dips when things go really wrong for the market as a whole.

Hydro One

The stocks mentioned have been long-standing performers; however, if you want the potential for superior growth from utility stocks, I would consider Hydro One (TSX:H). The company has only been on the market for about six years, making it a strong choice if you want superior growth in the early days.

I say that knowing this is still a utility stock with a lot of room to grow, whether through acquisitions or simply the renewable energy sector. Shares have grown by 11.54% CAGR since coming on the market, and guess what? This year they’re still up by 13%! That’s even after climbing 11% by August, dropping 13% by October, and being up 18% since then.

Right now, you can pick up a dividend of 3.05%, look forward to more growth, and get Hydro One stock while it’s doing well for some protection in your portfolio.

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 Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.

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