With a potential recession coming to Canada in the next 12 months, now seems like a smart time to look to utility stocks for greater stability. There’s no doubt that 2023 has been a risk-on year, with tech stocks continuing to blast off on the back of AI and hopes for decreasing interest rates over the next 18 months or so.
Indeed, as investors looked to up their tech exposure to get in on the AI action, many may have forgotten about the good, old-fashioned utility plays. They tend to hold up when the waters get rough. With markets approaching overbought conditions (the Dow Jones Industrial Average just came off of its biggest winning streak in five years), it may be wise to prepare for a bit of turbulence.
Indeed, no market rally can go on forever. And while I do think there’s a ton of value to be had out there, there’s always a chance that just a few quarterly earnings flops will cause stocks to retreat. At the end of the day, markets move in strange ways that are very difficult to predict.
So, if you’re a Canadian investor who’s underweight defensive dividend stocks (like utilities) and sitting on huge year-to-date gains from tech plays, it may be time to do a bit of sector rotation. Now, I’m not suggesting dumping your winners for some relative laggards. Rather, I think it’s only prudent to take a slice of profit off the table after a euphoric move in markets with the intention of putting it toward neglected value-conscious names.
In this piece, we’ll check out Fortis (TSX: FTS) and Emera (TSX: EMA), two utility stocks that currently sport bountiful dividend yields of 3.94% and 5%, respectively, at the time of writing.
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Fortis
Fortis is one of my favourite utility stocks to rotate into whenever I think markets get a tad too ahead of themselves. Shares of the cash cow have been fluctuating wildly over the past four years. Undoubtedly, there have been big slides and booms. Today, the stock’s in the middle of the range at $57 and change per share.
The dividend yield is flirting with the 4% mark, and the trailing price-to-earnings multiple is at a reasonable 19.5 times. For such a steady utility, I think Fortis is a tad undervalued, even if the economy doesn’t fall into a recession over the next 12-18 months. At the end of the day, Fortis is equipped to make money in all sorts of environments. It’s an all-weather play that may be time to capitalize on before the market’s winning streak concludes.
Emera
Emera is another high-quality utility play that has struggled to break out over the last four years. Undoubtedly, it seems like more of an industry overhang than a company-specific problem. In any case, EMA stock looks dirt-cheap at 13.1 times trailing price-to-earnings.
With a larger dividend yield than Fortis, I do view the utility as a great play for investors who value passive income over appreciation and long-term dividend growth. The $15 billion firm may not be exciting as everybody rushes toward AI plays. Regardless, I continue to view it as a cheap gem on the TSX.
Better buy: Fortis or Emera?
I like Fortis for its promising growth prospects and dividend growth potential. Shares look pricier, with a smaller yield, but I do think the premium is warranted.
