Utilities in Canada are among the best stocks for beginners for one simple reason: their business model. The primary revenue stream for most utility companies is the monthly bills paid by residential and commercial consumers. These bills are among the most highly prioritized necessary expenses, so utility companies tend to benefit from a steady revenue stream, regardless of the market conditions.
However, buying them when discounted and locking in a generous yield can make them more appealing.
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A Toronto-based utility company
Hydro One (TSX: H) has been catering to the population of Canada for over a hundred years. It dominates the rural market in the province and provides utility services to over 1.5 million customers, which makes up a quarter of the total customers in Ontario. However, it covers three-fourths of the geographic area of the province.
This makes it even more stable compared to a typical utility stock. The rural market requires extensive infrastructure investment, so the chances of a competitor encroaching on its territory are relatively low. The stock is modestly discounted, trading at almost 9.7% below its yearly peak.
The dividend yield is 3.24%. However, the primary strength of the stock is its capital-appreciation potential. The stock rose by about 83% in the last five years.
A Nova Scotia-based utility company
Emera (TSX: EMA) is among the large-cap stocks in the utility sector. The 16% discount has put a dent in the market capitalization of the company though it’s still $14.7 billion. It has several regulated companies and two unregulated business segments: i.e., Emera Energy and Emera Technologies. The regulated utility companies include electrical and gas companies in Canada and the Caribbean.
The stock’s performance has been dull lately (in the last five years at least), but if you stretch the performance evaluation period further back, it offers a compelling combination of capital-appreciation potential and dividends. Its total returns in the last decade were about 150%. The stock is currently discounted as well as modestly valued, making it an attractive purchase.
An Oakville-based utility company
If you have the adequate risk tolerance, Algonquin Power & Utilities (TSX: AQN) is a utility stock worth considering for its long-term potential. The company has stretched itself thin (financially) and recently slashed its payouts quite brutally. This eroded a lot of investor confidence and, consequently, the stock’s value. It’s trading at a 50% discount from its 2021 peak.
This massive discount has maintained the yield at a healthy level of 5.2%, even after the payouts were slashed. The fundamental strengths of the company, like its end-to-end utility business (from generation to transmission) and its renewable focus, are still relevant.
The chances of the company making a strong recovery in the long term seem decent enough, so buying now and locking in a healthy yield might be a smart thing to do.
Foolish takeaway
The three utility stocks can make compelling additions to your Tax-Free Savings Account or Registered Retirement Savings Plan portfolio. You can use them to generate a dividend income while simultaneously building up a nest egg through capital appreciation. If you opt for DRIP, you can focus both “return” channels on building the nest egg.
