2 TSX Utility Stocks to Buy and 1 to Avoid in April 2023

Utility stocks are excellent investments in bear markets, but not all of them should make the cut. Here are a few critical things to consider when investing in them.

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Utility stocks are popular among Canadian stock market investors for all market environments. While reputably boring in terms of price movements on the stock market, utility stocks offer the stability necessary to offset losses during bear markets. Due to the essential nature of their services, utility stocks are typically reliable assets to buy and hold.

With a recession imminent, it is time to re-evaluate your portfolio to determine the utility stocks you can add to your portfolio. Due to tightening monetary policies, not every utility stock presents itself as an asset you can invest in blindly. Today, I will discuss two utility stocks that can be solid buys and one TSX utility stock I recommend avoiding right now.

Buy: Fortis

Fortis (TSX:FTS) is a $28.97 billion market capitalization utility holdings company that owns and operates a portfolio of natural gas and electricity utility businesses across Canada, the U.S., Central America, and the Caribbean. Relying largely on highly rate-regulated and low-risk, long-term contracted assets for its revenue, Fortis is as safe a utility stock as they come.

Fortis generates predictable cash flows and boasts a multi-year capital plan to grow its rate base in the coming years. It has a clear path to expand its renewable energy segment to future-proof earnings, as the world shifts to greener energy. As of this writing, Fortis stock trades for $59.67 per share and boasts a 3.79% dividend yield.

Buy Canadian Utilities

Canadian Utilities (TSX:CU) is another major utility stock worth adding to your portfolio. The $10.33 billion market capitalization stock is a Canadian Dividend Aristocrat with an over 50-year dividend-growth streak, making it the only Canadian Dividend King.

While increased borrowing costs initially impacted Canadian Utilities stock along with the rest of its peers, the last few days of trading have seen it gain positive momentum on the stock market.

As of this writing, CU stock trades for $38.37 per share, boasting a juicy 4.68% dividend yield. The future will include a shift to greener energy sources for utility companies if they are to thrive, and CU stock is already transitioning.

While it primarily uses natural gas assets right now, it offers renewable energy options as well. Trading at a 9.70% discount from its February 2020 all-time high, it can be an excellent addition to your portfolio at current levels.

Avoid: Algonquin Power & Utilities

Algonquin Power & Utilities (TSX:AQN) is one of the leading TSX stocks when it comes to the renewable energy shift. However, the $7.84 billion market capitalization utility stock has not made it to my “buy” list for a potential recession hitting the stock market soon.

The tightening monetary policies to control inflation made life difficult for all utility stocks, but Algonquin has felt it more than its peers. With borrowing costs higher, the company was forced to slash its dividend payouts, ending its run as a Canadian Dividend Aristocrat.

Granted, Algonquin stock is up by 26.1% year to date in 2023, but it might not be an ideal investment right now. It is down by a substantial 47% from its February 2020 all-time high. Its latest earnings did not just fall short but missed by miles from its targets.

By slashing its dividends, AQN stock wants to strengthen its financial position. However, the higher-interest-rate environment can continue making things tough for the stock in the coming weeks.

While its upcoming quarterly earnings being positive can change things, its debt-servicing costs can still increase if interest rates rise further. Reduced profitability can mean it will take longer for Algonquin stock to return to being a stock to buy.

Foolish takeaway

Utility stocks are among the safest bets investors can make in the stock market. If you want stable dividend income and safety, almost all the top Canadian utility stocks can be no-brainers. However, not all of them are suitable for this purpose right now.

Fortis stock and Canadian Utilities stock appear to remain strong options to consider. Algonquin Power & Utilities stock seems too risky for risk-averse investors seeking stability in a recession.

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 Adam Othman 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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