Why Utility Stocks Could Be a Contrarian Safeguard Amid Growing Rates

Utility stocks look oversold right now.

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Utility stocks are taking a pounding as central banks continue to raise interest rates in an effort to cool off the economy and get inflation under control. There are some impacts on borrowing costs for capital projects, but the reaction appears overdone. Contrarian investors with a buy-and-hold strategy might want to start nibbling on top TSX utility stocks while they are out of favour and offer attractive dividend yields.

Enbridge

Enbridge (TSX:ENB) is known as an oil pipeline giant, but the energy infrastructure player is shifting its investments heavily towards growing the utility operations. The company recently announced a US$14 billion deal to buy three natural gas utilities in the United States. Enbridge’s Canadian natural gas utilities already serve more than three million customers. The addition of the American assets will make Enbridge the largest natural gas utility in North America.

In the future, hydrogen is expected to become an important fuel source that will be distributed through the natural gas infrastructure. Enbridge’s natural gas transmission assets already move 20% of the natural gas used in the United States.

Enbridge’s oil pipelines, oil export terminal, renewable energy assets, and the stake in the new Woodfibre liquified natural gas (LNG) export terminal round out the overall portfolio that will help generate cash flow in the coming years.

Enbridge trades for less than $43 per share at the time of writing compared to $59 at the high point last year.

The drop looks overdone, and investors can now get a dividend yield of 8.3% from ENB stock. Enbridge raised the dividend in each of the past 28 years.

Fortis

Fortis (TSX:FTS) recently announced its 50th consecutive annual dividend increase. The company is raising the payout by 4.4% and intends to continue the dividend growth with annual increases of at least 4% through 2028.

Fortis has added $2.7 billion in capital projects to its five-year plan, bringing the capital program to $25 billion. The result will be an increase in the mid-year rate base from $36.8 billion in 2023 to $49.4 billion by 2028.

Additional opportunities could extend the growth outlook. Fortis is a major electric transmission player in the United States with its ITC assets it acquired in 2016.

Fortis owns power generation, electric transmission, and natural gas distribution utilities in Canada, the United States, and the Caribbean. The company gets nearly all of its revenue from rate-regulated businesses. This makes cash flow reliable and predictable, which helps management plan out investments for growth.

Fortis stock is down to $50 compared to $61 earlier this year. The drop looks exaggerated, considering the quality of the cash flow and the essential nature of the services. Investors can currently get a 4.7% yield from Fortis stock.

The bottom line on utility stocks

Enbridge and Fortis are good examples of utility stocks paying attractive dividends that should continue to grow. As soon as rate hikes end, these stocks could rebound quickly. If you have some cash to put to work, ENB and FTS look cheap right now.

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.

The Motley Fool recommends Enbridge and Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Enbridge.

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