Canadian utility stocks are a top choice for investors seeking steady dividend income and the potential for reliable capital growth. These companies operate fundamentally strong and regulated businesses and generate predictable cash flows, enabling them to grow their earnings consistently, pay and increase their dividends, and generate steady capital gains. This combination makes them an excellent option for building a portfolio aimed at generating big total returns.
Against this background, here is a top Canadian utility stock to buy now.
Top Canadian utility stock
Investors looking for a solid utility stock could consider Hydro One (TSX:H). It is one of the leading electric utilities in North America. Moreover, Hydro One is the largest transmitter and distributor of electricity in Ontario, Canada’s most populous province.
Hydro One is a pure-play electric power transmission and distribution company. Unlike many other utilities, Hydro One is not involved in power generation or exposed to volatile commodity prices. This unique positioning enables it to deliver steady earnings and cash flows regardless of market conditions.
Hydro One’s business model is built on stability and growth. For instance, about 99% of its operations are fully rate-regulated, ensuring consistent and predictable revenue streams. Its growth strategy includes self-funded, organic projects driven by an expanding rate base and focusing on refurbishing aging infrastructure. Additionally, Hydro One’s small but growing unregulated business segment, currently contributing 1% of assets and revenues, offers opportunities for future expansion.
Thanks to its resilient business model and solid financials, Hydro One has been a reliable dividend-growth stock. Since 2017, the company has consistently increased its dividend payments. Moreover, it offers a decent yield of 2.8%.
Investors have also enjoyed significant capital appreciation, with the stock achieving a compound annual growth rate (CAGR) of 14.7% over the past five years, translating into strong total returns.
Hydro One is poised to deliver solid growth
Hydro One is a top long-term bet. Its predictable growth profile and robust multi-year capital investment program position it well to steadily expand its rate base, deliver consistent earnings, grow dividends, and outperform the broader markets.
In Ontario, electricity demand is on the rise, driven by population growth, the ongoing energy transition, and new manufacturing capabilities. Large-scale projects like data centres, electrification of commercial buildings, electric vehicle (EV) production, and related supply chains are expected to drive this demand even further. Hydro One is well-positioned to benefit from these trends by investing in advanced transmission and distribution systems, connecting renewable energy sources, and adopting innovative control technologies.
With a focus on modernizing and renewing its grid infrastructure and capital investments, Hydro One is set to see its rate base grow from $23.6 billion in 2022 to an impressive $31.8 billion by 2027. This expansion will directly boost the company’s earnings and enable it to maintain strong dividend payments.
Hydro One achieved substantial productivity savings through strategic outsourcing for equipment testing, pole refurbishment, and station planning. Additionally, efforts to diversify suppliers and optimize contracts have resulted in cost savings, contributing to a healthier bottom line.
Looking ahead, Hydro One projects its rate base to increase by a CAGR of 6% through 2027. This will drive its earnings by 5-7% annually. Alongside this, the company anticipates increasing its dividends by 6% per year.
Overall, Hydro One will likely deliver strong total returns for its investors. Its resilient business model, growing rate base, visibility into future earnings and dividend growth, and opportunities in unregulated business ventures position it well to enhance its shareholder value.
