Looking for a combination of lower volatility and higher than average dividend yields? A great place to look is the TSX utility sector, which has long been a favourite for defensive income-oriented investors. Thanks to the evergreen nature of this industry and inelastic demand for its services, utility stocks have been more resilient.
When it comes to utility picks, Canadian investors usually default to two companies: Fortis (TSX:FTS) and Canadian Utilities (TSX:CU). Both stocks have historically paid consistent dividends and fluctuated less than the market, but which one is better? Let’s find out.
The case for Fortis
Fortis is known for its stability and consistency in earnings, primarily driven by regulated utility assets. The company has a long history of raising its dividend, making it a go-to choice for income-focused investors. Its diversified geographical presence also helps spread risk and contributes to its robustness.
At present, Fortis is distributing an enticing annual forward dividend yield of 3.69%, which means that for every $100 invested, shareholders would theoretically receive $3.69 in dividends over the course of a year. This is a significant metric for income-focused investors who look for steady cash flow from their investments.
This enticing yield is achieved while maintaining a payout ratio of 74.8%, indicating that almost three-quarters of the company’s earnings are returned to shareholders as dividends. While this is a fairly high ratio, it’s not uncommon for utility companies, known for their stable cash flows and generous dividend policies.
Currently, Fortis boasts a remarkably low five-year beta value of 0.17. The beta value is a measure of a stock’s volatility, or its price movement, in relation to the market. A beta less than 1 suggests that the stock is less volatile than the market, while a beta greater than 1 indicates that the stock’s price is more volatile.
In Fortis’ case, a beta of 0.17 means that the stock has been significantly less volatile than the market over the past five years. This low beta suggests that Fortis’ stock price has been relatively stable, experiencing smaller fluctuations even when the broader market has been volatile.
The case for Canadian Utilities
Canadian Utilities’ core strength lies in its well-established, regulated asset base, providing a predictable cash flow stream. Recently, it has also focused on investments in renewable and clean energy technologies. Compared to Fortis, it has a much smaller market cap of $10.5 billion versus $28.4 billion.
The company also has a history of delivering reliable dividends, similar to Fortis. Currently, Canadian Utilities is paying a higher forward annual dividend yield of 4.57%, against a similar payout ratio of 77.8%. The stock is also more volatile with a beta of 0.57, which is low but higher than Fortis’.
I’m also more impressed with Canadian Utilities’ balance sheet. CU has a higher current ratio of 1.1 and total cash of $725 million compared to Fortis at 0.68 and $576 million, respectively. This suggests that Canadian Utilities is in a better position to cover short-term liabilities and retain financial flexibility.
The Foolish takeaway
There’s no reason why investors have to pick just one. Given the strengths and weaknesses of each, I’d be inclined to split the difference and hold both. Another way is to simply purchase an exchange-traded fund (ETF) like the BMO Equal Weight Utilities ETF (TSX:ZUT), which holds 16 TSX-listed utility stocks in equal proportions, including Fortis and Canadian Utilities.