When it comes to candidates you’re thinking about buying for your TFSA (Tax-Free Savings), it can pay literal dividends to think longer term. With the great rotation out of high-beta momentum stocks (specifically the AI-related plays) and into the boring but bountiful dividend-paying names underway, I do think it makes sense to have a look at the steadier utility plays that might still have ample value at current prices.
For those looking to hang onto a dividend grower for the next 20 years, a play like Hydro One (TSX: H) really does stand out. Of course, like most other Canadian utility stocks, shares are in the midst of a heated run to new heights. While the bull is very much in control, I certainly wouldn’t be afraid to pay a slight premium, even if it means feeling more pain come the next inevitable correction, while taking on a yield that’s on the lower end of the historic range.
As of the time of this writing, shares of Hydro One trade at 24.2 times trailing price-to-earnings (P/E). The stock has been melting up in recent months, but remains off 5% from all-time highs. I think that it’s just a matter of time before new highs are in the books as the steady dividend grower looks to ride high on tailwinds while also promising relative steadiness for investors looking for something to stabilize the safety side of a barbell portfolio.
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Hydro One stock isn’t cheap, but it doesn’t deserve to be
That’s not cheap, but in terms of firms with wide, regulated economic moats and a monopolistic share of the market (Ontario’s transmission lines), I think a pretty strong argument can be made for a richer premium, especially in this environment, where safety and stability are having their moment as volatility sweeps through the momentum trade this autumn.
Indeed, it’s cheaper to punch your ticket before any market-wide volatility takes things up a notch and sentiment skews towards being more fearful than greedy. And while the growth-to-value rotations haven’t lasted all too long, I do think that nibbling on a steady utility play like H stock could make a lot of sense, as long as you’re willing to keep adding to a position over time and on dips.
For those seeking a multi-decade-long holding, I do think that it’s tough to stack up against H stock, especially as the firm commits to investing more to get the grid where it needs to be to meet rising demand.
The bottom line
If Canada is on the cusp of an AI data centre boom (and I do think it is, as projects get the green light while progress south of the border faces more hurdles now that Democrats swept the midterm elections), perhaps the boom in steady utility plays, like Hydro One, isn’t quite priced in yet.
For now, Hydro One and the broader basket of utility stocks are starting to evolve as the new momentum plays. As investors shift from speculation and heat to value and stability, my guess is names like Hydro One could finish the year on a high note.
