When markets are volatile, many investors typically avoid allocating any capital to growth stocks. For Canadian investors, 2023 has been a year chock full of uncertainty. Since investing in high-growth stocks entails a greater degree of capital risk, many investors seek safer alternatives instead.
To this end, investing in defensive businesses offers a relatively lower-risk way to put your money to work in the market. When it comes to defensive businesses, the utilities sector is a shining example.
Investing in utility stocks
People typically cut discretionary expenses during uncertain economic situations. Regardless of their overall buying power, people cannot cut their electricity and gas utilities to save money.
No matter what happens in the market or around the world, these businesses are necessary to continue powering our homes and businesses. While rising interest rates might hamper finances in the short term, utility stocks have always proven to be excellent investments in the long run.
Considering that the only two Canadian Dividend Kings on the TSX are utility stocks today, it is easy to see why utility businesses are good long-term investments. Utility businesses achieve these feats through their successful business models.
The top utility businesses in Canada typically rely on long-term contracts in rate-regulated markets, securing predictable revenue for the companies.
The revenue these companies earn can then go toward acquiring more companies and growing shareholder dividends. However, today, we will not be discussing Canadian Dividend Kings. Instead, we will look at a newer entry in the utility industry that can provide unusually high capital gains.
Hydro One
Hydro One (TSX:H) is one of the best utility stocks to consider adding to your portfolio if you want to leverage long-term growth potential at a bargain. Hydro One stock is the largest utility provider in Ontario.
Catering to the most populated province in the country, it has one significant advantage over several of its peers in the energy and utilities sector: it does not rely on oil or gas to produce energy.
As its name suggests, Hydro One generates power using hydroelectric facilities. While changing oil and gas prices can significantly impact costs for other utility businesses, Hydro One enjoys the safety of a renewable energy source for its power production.
It means the company will not see a slump in earnings whenever oil prices go up. The company can enjoy better consistency than its peers relying on fossil fuels.
Additionally, the province of Ontario has a major stake in Hydro One, providing the utility business with the advantage of government funding.
Foolish takeaway
As of this writing, Hydro One stock trades for $38.03 per share. In the last five years, it has gained by over 78.96%. At current levels, it pays its shareholders their dividends at a 3.12% dividend yield.
Granted, it trades at a fair value with its 21.16 times trailing earnings. Well capitalized and well managed with a strong business model, Hydro One stock might just become another Canadian Dividend King in the future.
