When market volatility hits, investors are reminded to diversify with one or more defensive stocks. Utility stocks can offer that sought-after stability and much more.
But why invest in a utility at all? Let’s try to answer that question first.
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The benefit of a utility investment
So then, what makes utilities great investments? That comes down to the lucrative business model that they adhere to. In short, utilities provide a service backed by long-term regulated contracts.
For as long as the utility continues to provide that service, it receives a stable and recurring revenue stream. Oh, and in case you’re wondering about the duration of that regulated contract, they frequently span more than a decade in duration.
That level of defensive stability is rare to find in the market, but that’s not the only reason why utilities offer sought-after stability.
The stable revenue stream generated by the utility allows the company the flexibility to invest in growth initiatives and provide investors with a healthy dividend.
Here’s a look at two utility investments that offer that sought-after stability and much more.
Renewable energy is something you cannot ignore
Renewable energy is an area of the market that holds massive long-term potential. That potential stems primarily from the changing mix (and, by extension, requirements) among electricity generators.
For traditional utilities, that potential is often offset by the massive costs associated with transitioning.
But what if a utility was already renewable and still adhered to that lucrative utility business model?
That’s precisely why investors looking for a utility stock with sought-after stability should take a look at TransAlta Renewables (TSX:RNW).
TransAlta operates a growing portfolio of over 40 facilities located across Canada, the U.S., and Australia. Those facilities include gas, solar, wind, and hydro elements. And like its traditional fossil fuel peers, those facilities adhere to the same long-term regulated contracts.
In fact, many of TransAlta’s contracts span well into the next decade and beyond, making the stock a unique option to consider for long-term growth.
Despite that appeal, TransAlta’s stock has retreated over 30% over the trailing 12-month period. Much of that drop can be traced back to rapidly increasing interest rates.
As an income stock, TransAlta really shines. That stock price decline has resulted in TransAlta’s dividend swelling to an insane 7.56% yield, which is distributed on a monthly cadence.
You cannot ignore this awesome potential
It would be nearly impossible to mention a list of utility stocks that provide sought-after stability and mention Fortis (TSX:FTS). Fortis is one of the largest utilities on the continent. The company operates across 10 regions that cover parts of Canada, the U.S., and the Caribbean.
Fortis’s portfolio is well diversified and changing. The company’s power generation stems from a variety of sources, including gas, wind, solar, and hydro. Collectively, Fortis boasts 3.4 million customers across both its electric and gas segments.
Unlike many of its peers, Fortis has taken a more aggressive stance toward expansion. That’s a key reason why Fortis has become the $64 billion behemoth it is today in just four decades.
In recent years, Fortis has turned that growth focuses away from expansion and onto its existing facilities. Specifically, Fortis has earmarked billions to upgrade and transition its portfolio over to renewables. This adds yet more long-term potential to an already stellar pick.
But that’s not all.
Turning to income, Fortis provides investors with a juicy quarterly dividend. The current yield on the dividend works out to 3.93%, which means that a $40,000 investment will generate an income of over $1,500.
Even better, prospective investors should note that Fortis has a 49-year streak of providing generous annual upticks to that dividend. In case you’re wondering, that’s the second-longest streak on the market, and Fortis has no plans to stop that tradition anytime soon. In fact, Fortis is on track to become the second Dividend King on the market once it announces a 50th consecutive hike this year.
That factor alone makes Fortis an investment with sought-after stability for any well-diversified portfolio.
