Utility stocks: they might not be as flashy as tech stocks, nor as oligopolistic as bank stocks, but they play an important role in the TSX and in the Canadian economy. Beyond keeping our lights, power, and gas on, these utility stocks also act as defensive anchors for many portfolios.
Thanks to inelastic demand or their services, utility stocks tend to enjoy much more stability as a sector compared to more cyclical ones like consumer discretionary. The strict regulations on their rates also ensures sustainability in margins, which translates to consistent dividends for investors.
However, there is still substantial variation within the TSX utility sector. Different utility stocks can have widely different fundamentals, outlooks, volatility, and yields. Let’s take a look at two of my TSX utility picks today — one that’s lower risk and one that’s higher risk.
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Staying low risk
A solid mid-cap utility stock with a $9.6 billion market cap to consider is the aptly named Canadian Utilities Limited (TSX: CU). Historically, this stock has been a great dividend payer, with a five-year average yield of 4.8%. Right now, Canadian Utilities has an estimated forward dividend yield of 5.13%.
The other reason I like Canadian Utilities is due to its lower-than-average beta — a measure of sensitivity and volatility relative to the market. Right now, the stock has a five-year monthly beta of 0.56, making it half as sensitive to and volatile compared to the market’s beta of one.
However, there are some things to watch out for. I’m a little bit wary of Canadian Utilities’s payout ratio of 80.93%. While not unsustainable, it is trending a bit high, especially given that the stock has seen a recent decline in year-over-year quarterly revenue growth.
Going higher risk
Investors looking to maximize yields with TSX utility stocks can consider Algonquin Power & Utilities (TSX: AQN), which currently pays a forward annual dividend yield of 9.59%. This is incredibly high. But before you buy, consider looking into it further to understand why.
Algonquin’s projected dividend yield is high, because the stock recently suffered a large loss, falling around 49% in 2022 after a poor November 2022 earnings report. The company reported a significant decrease in their net earnings and higher interest expenses, which shareholders didn’t like.
Because dividend yields are calculated based on the company’s share price, Algonquin will naturally show a high projected yield. However, if management cuts the dividend to conserve cash, this high yield won’t materialize. Therefore, I consider AQN to be a higher-risk bet on a possible recovery.
