As both interest rates and inflation surged over the past two years, significantly hurting the economic landscape in Canada, many investors are scrambling to ensure that their stock portfolios are prepared for what comes next. And in this environment, there’s no doubt that utility stocks that pay an attractive dividend are some of the best investments Canadian investors can add to their portfolios.
Utility stocks are some of the best to buy, especially in uncertain market environments, because they are so defensive. They are regulated by governments and provide essential services, making them highly immune to recessions and some of the best stocks to buy and hold for the long haul.
Plus, if you’re looking to buy top Canadian utility stocks today, many are trading off their highs and offering high-than-normal yields after interest rates have been increased so dramatically.
Not to mention, many utility stocks, especially the best companies to own, are constantly increasing their payouts to investors each year. This is crucial because it allows your passive income to grow consistently. Because these stocks raise their dividends at a rate that outpaces inflation, you consistently see a higher return on your investment.
Inflation surged to more than 8% in Canada last year, and although it’s cooled off, it’s still higher than the standard 2% level that central banks target at 3.8% today.
So, if you’re looking to shore up your portfolio and consistently increase your passive income, here are three Canadian utility stocks with dividends that outpace inflation.
Two of the top Canadian utility stocks to buy now
There are several high-quality utility stocks to consider for your portfolio. However, two of the best Canadian utility stocks you can buy for the core of your portfolio and plan to hold for years to come are Hydro One (TSX:H) and Fortis (TSX:FTS).
Hydro One is one of the largest electrical utilities in North America and has one of the strongest balance sheets in the utility sector.
While it doesn’t have a lengthy dividend-growth history like other utility stocks, it only went public in 2015. In the nearly eight years since it’s gone public, though, it’s shown what an impressive and reliable stock it can be and has grown investors’ capital at a compound annual growth rate (CAGR) of 10.4%.
And with Hydro One aiming to keep its payout ratio between 70% and 80%, investors can be confident in the reliability of the dividend, which has a current yield of 3.3%.
Plus, in just the last five years, Hydro One has increased its dividend at a CAGR of 5.3%, making it one of the best Canadian utility stocks to buy to outpace inflation.
Fortis has also grown its dividend at a similar pace, with a CAGR of 5.7% over the last five years. And its streak of increasing the dividend sits at a whopping 50 consecutive years, one of the major reasons Fortis is such a popular utility stock for Canadian investors.
Its operations are also more diversified than Hydro One, operating in 10 different jurisdictions across North America and offering gas and electricity services.
And with the stock trading cheaply today and offering a yield of more than 4.3%, now is a great time to consider adding Fortis to your portfolio.
A high-quality defensive growth stock offering attractive dividend growth
While you can buy utility stocks like Fortis and Hydro One, there are other high-quality dividend-growth stocks with diversified business models that offer some exposure to the utility sector, such as stocks like Enbridge or Brookfield Infrastructure Partners (TSX:BIP.UN).
In Brookfield’s case, the stock owns high-quality and essential assets worldwide, giving it a tonne of diversification, which some investors might prefer.
Its utility segment owns roughly 71,600 km of electricity distribution lines and 16,200 km of natural gas pipelines. It also contributes the most funds from operations of the four segments Brookfield has.
Plus, the Canadian dividend stock aims to increase its distribution between 5% and 9% each year and over the past five years, has increased it at a CAGR of 6.2%.
So, with Brookfield also trading cheaply today and offering a yield of more than 5.8%, it’s certainly one of the best Canadian dividend stocks to buy now.
