Utilities stocks may have a track record of being just a bit boring, especially for younger, beginner investors who’ve been drawn into financial markets more by major movers. These days, it’s all about those high-momentum AI plays, specifically those that bet on the chokepoints or bottlenecks of the big AI data centre buildout.
While there’s certainly nothing wrong with buying a winning stock that just keeps posting wins on a regular basis, I’d argue that it also makes sense to consider names that could hold your portfolio steady when things finally do go awry. Indeed, higher rewards often accompany taking on more risk.
In my view, I think it makes more sense for a new investor to consider both sides of the coin as they seek to invest in the risky growth play while also placing a few chips in the defensive dividend payers that can hold their own when market volatility appears suddenly, perhaps in a manner that causes some to panic-sell. It’s a “barbell” kind of approach that entails smart risk-taking with growth names but also defensive posturing, so one isn’t put in a spot to hit the panic button when the going finally does get rough.
Seeing as markets correct every year or so (more or less), it just makes sense to consider the boring, steady side of the portfolio as well, even if you’re many decades away from your expected retirement date. In this piece, we’ll look at one strong utility play that I think is worth a second look, while others concentrate on stocks more directly exposed to the AI boom.
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Hydro One
Enter shares of Hydro One (TSX: H), a fantastic utility firm that has thrived in the monopolistic market of Ontario’s transmission lines. There are steady and boring utility plays, and then there are ones with insurmountable moats. Hydro One ought to be grouped in the latter camp. The stock itself isn’t all that boring, either. Not with close to 50% gains posted in the past two years.
For an investor seeking capital appreciation and dividend growth, you really can’t ask for more! The valuation is getting up there, though, and that’s the only thing that’d have me on pause. At close to 26 times trailing price-to-earnings (P/E), there’s simply no denying that the name is getting kind of expensive!
But, then again, quality comes at a price, and in the case of Hydro One, I do think the premium is well worth paying, especially as the management team continues to deliver. While the new CEO could bring forth a bit of uncertainty, I don’t expect a whole lot to change in the coming months.
While Hydro One isn’t exactly a direct play on the rise of AI, you have to remember that the boom is constrained by the grid. And Hydro One is actually a way to play both sides of the barbell, as it helps get Ontario’s power infrastructure to where it needs to be as the AI data centres eventually do come online.
I don’t know about you, but I’d be happy collecting a 2.4% dividend yield and steady capital gains, rather than taking more risk with an AI play itself, especially considering how far valuations have climbed with such momentum names.
