If you’re looking for safety in the TSX, the utility sector is often a solid bet. Utilities are essential – people always need water, gas, and electricity, regardless of the economy’s ups and downs. This consistent demand makes utility stocks a go-to for risk-averse investors – they’re called “widow & orphans” stocks for a reason!
Plus, utilities tend to have lower volatility and provide stable, regulated cash flows, making them an excellent choice if you’re aiming to protect your investments from market swings. Here are my top three picks for defensive utility stocks on the TSX that offer both security and reliable dividends.
Why own utilities?
Right now, I think it’s particularly opportune to overweight utilities in your portfolio due to recent economic shifts. Interest rates have been cut three times this year by 0.25% each, which typically benefits utilities.
Lower rates can reduce their borrowing costs for capital-intensive projects and make their high dividend yields even more attractive relative to bonds.
What I look for in utility stocks are several key traits: a lower beta, indicating less volatility compared to the market; involvement in regulated electricity generation and distribution, which tends to be more stable than commodities like gas; and a focus on traditional rather than renewable sources, which often have more predictable cash flows
Finally, I screen for a reasonable dividend payout ratio relative to distributable cash flow – since earnings can often be heavily reinvested into infrastructure, evaluating dividends against cash flow provides a clearer picture of sustainability.
Three lower-risk TSX utilities to buy
Here are three lower-risk utility stocks that I think are worth considering for their stability and reliable dividends.
Hydro One (TSX: H): Operates primarily in electricity transmission and distribution, serving as a crucial link between generators and consumers. It features a low beta of 0.34, underscoring its minimal volatility, and offers a solid dividend yield of 2.7%. It’s also 47% owned by the Province of Ontario.
Fortis (TSX: FTS): This company provides gas and electricity to customers across North America, with a low beta of 0.22, indicating low market volatility. It has an attractive dividend yield of 3.9% and is recognized as a dividend king, having increased its dividends for over 50 consecutive years.
Canadian Utilities (TSX: CU): Engaged in the distribution, transmission, and generation of electricity and gas, Canadian Utilities also boasts a lower beta of 0.65, providing less exposure to broad market movements. It offers a higher dividend yield of 5.1% and, like Fortis, is a dividend king with over 50 years of consecutive dividend increases.
