The market correction is giving investors who missed the rebound off the 2020 crash another opportunity to buy top TSX utility stocks at discounted prices for their self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolios.
Impact of rate hikes on utility stocks
Utility stocks are popular among income investors who like reliable revenue streams and dividend growth. Soaring interest rates over the past year, however, have pushed up the rates that investors can get from no-risk Guaranteed Investment Certificates (GICs). Investors who are seeking passive income and want to reduce risk in their portfolios might be selling utilities in favour of fixed-income alternatives.
Utilities grow through acquisitions and development projects. Debt is normally part of the funding used to pay for these initiatives. As borrowing costs increase, there can be a negative impact on profits and a potential reduction in cash available for distributions.
Interest rates might continue to increase in the coming months and could stay elevated for some time. That being said, the Bank of Canada and the U.S. Federal Reserve will eventually get inflation under control and will have to lower rates to avoid causing a major recession. As soon as rates begin to decline, the share prices of utility stocks should recover.
Fortis (TSX:FTS) trades near $50 per share at the time of writing compared to $61 in May.
The company has $64 billion in utility assets located across Canada, the United States, and the Caribbean. Fortis gets 99% of its revenue from regulated businesses that include power-generation facilities, electric transmission networks, and natural gas distribution operations. These are essential services that are required, regardless of the state of the economy.
Fortis is working on a $22.3 billion capital program that is on track to boost the rate base from $34.1 billion to $46.1 billion over five years. The resulting increase in cash flow as the new assets go into service is expected to support planned annual dividend increases of 4-6% through 2027.
Fortis increased its dividend in each of the past 49 years, so investors should be comfortable with the outlook. At the current share price, the dividend provides a 4.7% yield.
Emera (TSX:EMA) is another utility with businesses located in Canada, the United States, and the Caribbean. The bulk of the assets are electricity and natural gas transition and distribution utilities with a large presence in eastern Canada and Florida.
Emera is working on a capital program of about $8 billion, with $2.8 billion being deployed in 2023. The new assets are expected to support annual dividend growth of at least 4% through 2026. Emera recently announced an increase to the annualized payout from $2.76 per share to $2.87.
The stock looks oversold right now, considering the reliability of the revenue stream and the outlook for asset growth. Emera trades below $45 per share at the time of writing compared to $59 in May. Investors who buy the pullback can get a 6.1% yield today from EMA stock.
The bottom line on top Canadian utility stocks
Fortis and Emera pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA or RRSP, these stocks look cheap right now and deserve to be on your radar.