Peaking interest rates hurt utility stocks in 2023 because the sector is rate sensitive. However, the rebound should begin with the first rate cut. Meanwhile, Algonquin Power & Utilities (TSX: AQN) and Superior Plus (TSX: SPB) can help Tax-Free Savings Account (TFSA) investors realize the full potential of their $7,000 limit in 2024.
Algonquin trades at $7.78 per share and pays a lucrative 7.48% dividend. You can purchase nearly 900 shares and generate $130.90 in tax-free quarterly income. Suppose you choose Superior Plus, a $6,999.39 investment will transform into a $134.39 quarterly dividend income. The share price is $9.37, while the dividend yield is 7.68%.
Moving to a pure-play regulated utility
Algonquin Power & Utilities provides rate-regulated natural gas, water, electricity generation, transmission and distribution utility services. Its Regulated Services group caters to customers in Canada, the U.S., Bermuda, and Chile, while the Renewable Energy business operates in Canada, the U.S., and select international markets.
The primary focus of the $5.36 billion renewable energy and regulated utility company is to strengthen the business to support sustainability and success over the long term. A strategic plan of identified projects is also in place to ensure rate base growth. Algonquin expects to deliver strong shareholder returns through earnings, cash flow, and dividends.
In the first three quarters of 2023, revenue and cash provided by operations increased 1% and 6% year over year to US$2.03 billion and $427.3 million. However, the net loss attributable to shareholders widened by 15% to US$157.6 million as interest expense rose 391% to US$19 million in the third quarter (Q3) of 2023.
Nevertheless, its interim chief executive officer (CEO), Chris Huskilson, said, “I believe the company’s two businesses have untapped potential and bright futures ahead. There’s a substantial opportunity to simplify, streamline, and reinvest for greater customer service and value.”
In Q3 2023, Algonquin started selling its sizable fleet of high-quality renewable assets and an extensive development pipeline, but not at fire-sale prices. Also, the non-regulated power business should have interested buyers because of the strong renewable development platform.
Huskilson is convinced the right move for both businesses is to become a pure-play regulated utility. Algonquin plans to invest over $100 million to accelerate the modernization of its electricity infrastructure.
Utility-like cash flow streams
The primary businesses of Superior Plus are propane distribution and compressed natural gas, renewable natural gas and hydrogen distribution. This $2.33 billion company delivers clean-burning fuels to residential, commercial, utility, agricultural, and industrial customers in North America without connecting to a pipeline.
Notably, the propane business boasts utility-like cash flow streams supported by an organic growth engine. In the first three quarters of 2023, revenue increased 3% to $2.37 billion versus the same period in 2022, while net loss thinned 100% to $500 million from a year ago.
Certarus is the next-generation organic growth engine. Superior Plus acquired the leading provider of low-carbon energy solutions in May 2023. In Q3 2023, Certarus’s adjusted earnings before income tax, depreciation, and amortization reached a record $35.5 million.
Significant TFSA limit
Some TFSA users need to pay more attention to the power of the yearly TSFA contribution limits. The new $7,000 limit appears small but is significant because it could be the equivalent of recurring income streams for years when you invest in high-yield utility stocks.
