Call it the revenge of the widows and orphans.
As trade tariffs and geopolitical turmoil trigger steep losses for stocks around the world, one of the market’s traditionally most conservative sectors is providing some shelter from the chaos.
Utilities – known as “widows and orphans stocks” for their high dividend yields and low-risk but typically unexciting returns – have been largely insulated from the chaos for several reasons.
As regulated monopolies whose rates are set by public utilities commissions, these stocks are generally less volatile than the broader market. Their relatively predictable earnings also allow utilities to pay above-average dividends that in many cases grow year after year.
What’s more, because utilities provide commodities that everyone needs in good times and bad, they are largely insulated from economic downturns. You might cancel your Netflix membership or switch grocery stores to save money, but you aren’t going to cut off your natural gas or electricity service.
Falling interest rates have provided yet another tailwind for utilities. Reflecting their above-average dividend yields and predictable returns, utilities stocks behave somewhat like bonds, with rising rates causing their prices to fall and lower rates giving prices a boost.
All of these factors have made utilities one of the few pockets of strength in the market.
Last week, even as major indexes suffered their deepest declines since the early days of Covid-19 pandemic, many utilities continued to rise in price. The gains were on top of solid price increases in the first quarter, when Emera Inc. (EMA) advanced 12.8 per cent, Fortis Inc. (FTS) rose 9.7 per cent, Hydro One Ltd. (H) added 9.3 per cent and Canadian Utilities Ltd. (CU) gained 6.2 per cent.
Utilities were swept lower early in Monday’s trading, but they are still holding on to solid gains for the year as investors look for relatively low-risk options.
“Stable, economically resilient regulated utilities are attracting capital,” analysts at CIBC Capital Markets said in a recent note to clients. CIBC cited economic and geopolitical uncertainty, utilities’ strong fourth-quarter results, generally encouraging regulatory and growth outlooks, and minimal direct impact from tariffs.
Among individual utilities, CIBC has “outperformer” ratings on Emera, Brookfield Infrastructure Partners LP (BIP.UN), AltaGas Ltd. (ALA) and ATCO Ltd. (ACO.X), parent of Canadian Utilities. “Defensive names like [Hydro One] and [Fortis] should also perform relatively well given current sentiment,” the CIBC analysts said.
Fortis has long been a favourite of investors, for several reasons. As the largest Canadian-based utility by market capitalization, the company has increased its dividend for 51 consecutive years and is projecting annual dividend growth of 4 per cent to 6 per cent through 2029, driven by $26-billion in capital spending. Adding to Fortis’s appeal, 99 per cent of its electricity and gas utility assets in Canada, the U.S. and the Caribbean are regulated, contributing to stability of returns.
“We believe the market is growing increasingly positive on FTS’s ability to deliver growth upside topped with a [foreign exchange] tailwind” from the weak Canadian dollar, Ben Pham, an analyst with BMO Capital Markets, said in a note following the release of Fortis’s fourth-quarter results in February.
One of Fortis’s flagship assets is ITC Holdings Corp., which operates power transmission lines across seven states in the U.S. Midwest. ITC “gives Fortis an opportunity to benefit from a long runway of U.S. transmission investment opportunities from [upgrading] aging infrastructure to supporting renewable energy growth,” Andrew Bischof, an analyst with Morningstar, said in a research note in March.
Not comfortable investing in individual utilities? Several exchange-traded funds provide diversified exposure to the power and utilities sectors, reducing single-stock risk and eliminating the need to monitor individual companies.
The iShares S&P/TSX Capped Utilities Index ETF (XUT), for instance, holds a basket of 15 utilities and power producers. The ETF charges a management expense ratio of 0.61 per cent and yields about 3.9 per cent, based on quarterly dividends paid over the past 12 months.
For the year through March 31, XUT posted a total return of 19.9 per cent, including dividends.
Another option is the BMO Equal Weight Utilities Index ETF (ZUT), which charges an identical MER and has a similar yield. ZUT posted a total return of 24.1 per cent over the past year.
These are unusually strong returns for utilities and power producers, and it’s unlikely we’ll see a repeat of such outsized gains over the next 12 months. But if you’re looking for investments that churn out a growing stream of cash and are insulated to an extent from the economic and political chaos, utilities are a good bet – and not just for widows and orphans.
Disclosure: the author owns BIP.UN, CU, EMA and FTS personally and in his model Yield Hog Dividend Growth Portfolio. View the model portfolio online at tgam.ca/dividend-portfolio.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.