Income-focused investors can find bond proxies in the utility sector. The top constituents on the TSX can even be anchor investments in a conservative or risk-averse portfolio. However, you should carefully assess the risks before including Algonquin Power & Utilities (TSX:AQN) on your buy list.
Despite the low $8.74 share price and a super-attractive 4.2% dividend yield, AQN shows signs of being a value trap, rather than a quality investment. Its 2025 positioning as a pure-play regulated utility failed to spark investor interest. The stock faces several red flags, including potential dividend cut, suggest heightened risk.
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Green growth gone
The $6.7 billion diversified generation, transmission, and distribution utility company was envisioned to be a green growth investment opportunity. On January 8, 2025, Algonquin announced the completion of the sale of its non-regulated renewable energy business, excluding hydro. The wind and solar assets were supposed to be growth engines.
According to management, Algonquin will use the proceeds from the $2.5 billion transaction to pay down debt and strengthen its balance sheet. The goal is to become a simpler, pure-play regulated utility and focus on accelerating the pace of energy transition.
The current business structure shows two core business segments. Hydro is a separate group. Electric, natural gas, and water distribution & waste water collection utilities comprise the Regulated Services Group.
Financial performance
The rationale for the disposition of the renewable energy business is to drive growth in earnings and cash flows. It should likewise support a sustainable dividend and share price appreciation. As of this writing, AQN trades at $8.74 per share, a 41% increase since the sale of the wind and solar assets.
Algonquin reported a net loss of $1.4 billion in 2024 compared to the $28.7 million profit in 2023. The company reported net income in Q1, Q2, and Q3 2025, resulting in a $186.5 million profit after the first three quarters compared to the $1.22 billion net loss in the same period in 2024. In Q3 2025, net earnings climbed 49% year over year to $73.7 million.
The silver lining is the 30% reduction of long-term debt from $8.8 billion in early 2024 to $6.16 billion at the end of Q3 2025.
Dividend sustainability
AQN lost favour with investors following two dividend cuts since 2020 (40% slash in late 2024) due to higher interest rates, rising interest expense, and declining cash flows. The stock could lose more investors if another slash occurs. Dividend sustainability remains an issue in 2026, although the 4.2% yield is below the trap level, or 7%. However, based on published data, the current payout ratio is 368.3%.
Better alternatives
Algonquin is not the top-of-mind option if you’re looking for a bond proxy in 2026. Industry peers Fortis and Hydro One are better, alternative options in the utility sector. While their dividend yields are modest compared with AQN, the payouts are safe and sustainable.
All investors want a real, profitable investment and not fall into a trap. Algonquin Power & Utilities is on shaky ground at the moment and still looking for a permanent fix.
