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There’s no sure thing in stock investing, but it’s smart to look at companies whose products people can’t live without—including Canadian utilities.
What should Canadian investors consider buying right now? The answer might surprise you. Dismayed by a stream of negative news and incessant stock market volatility, some investors are seeking refuge in safe-haven securities. The search for stability has sparked (pun intended!) a renewed interest in the Canadian utilities sector and elsewhere.
Canadian utility companies aren’t very glamorous, but many have proven stable over time. After all, we can’t do without power and fuel, which gives utility companies—which provide electricity, natural gas, and sewage and water services to residential and business customers—a measure of resilience against market volatility and economic uncertainty.
Government regulation, limited competition and consistent consumer demand help keep utility companies’ stock performance relatively stable and predictable. Moreover, these stocks typically pay out juicy dividends, which offer investors the added benefit of income generation in their portfolios.
Utilities are often thought of as a defensive sector of the market because consumers always need their services. This inelastic demand means utilities’ earnings are somewhat shielded from the contraction phase of business and economic cycles.
Furthermore, the global pivot to green energy and the resultant demand for reliable and clean electricity have created a strong tailwind for the power and utilities sector. A report from the International Energy Agency (IEA) forecasts nearly USD$2.8 trillion will be invested in energy in 2023, including USD$1.7 trillion in clean energy. Another IEA report finds that renewables are set to account for over 90% of global electricity expansion over the next five years.
Here are some of the key trends that could continue to fuel the utilities sector’s long-term growth:
These trends underscore long-term opportunities for the utilities industry in Canada and around the world, driving the sector’s growth prospects in the coming years.
Investors interested in the local and international utilities sector have a wide range of businesses and industries to choose from, including electric, gas and water utilities, renewable energy producers, energy infrastructure and related services.
Investors can get exposure to these industries. One option is to buy individual stocks, which typically requires detailed research and a broad understanding of the sector. For most investors, a better option could be to invest in a basket of securities comprising companies across the sector. A utilities ETF, for instance, may be a cost-effective way to achieve broad exposure.
One such ETF is the Harvest Equal Weight Global Utilities Income ETF (HUTL). The ETF holds 30 blue-chip global utility companies, which can help spread out risk and offer convenience and diversification through a single investment. The portfolio holds companies from industries as diverse as electric utilities, telecommunications, oil and gas storage, and transportation, providing exposure to a range of growth opportunities.
“The global exposure offered by HUTL helps to offset some of the risks related to the utilities sector, such as natural disasters, a change in regulations or over-concentration to a particular sector or area that could fall out of favour with the market,” says Paul MacDonald, Harvest ETFs’ chief investment officer and portfolio manager. “By delivering a globally diversified basket of utilities from a range of subsectors, HUTL can offer stability and a high income yield with risks offset by diversification.”
Leading utility companies in the U.S., Canada and the U.K. make up approximately 70% of the HUTL portfolio. The primary goal of the ETF is to deliver consistent and attractive monthly income to investors, along with the opportunity for capital appreciation.
HUTL offers a stake in global utility and telecommunication companies, including Enbridge, Duke Energy, Telefonica, AT&T, BCE, E.ON, Telus and KPN, among others. This global exposure can help diversify regional risk and capture opportunities across different geographic regions.
Owning a basket of companies also helps ensure consistency of income by not relying on one particular region or company for investment growth.
Leading utility players are pursuing emerging global trends through adoption of new technologies, digitization, infrastructure upgrades and renewable power generation, each unlocking new growth opportunities for productivity and profitability.
An attractive aspect of HUTL is the use of an “active covered call strategy” to boost the amount of income it generates each month. The covered call writing strategy involves selling call options on the securities held within the fund to generate higher income.
“Utilities is often considered an attractive sector because of the dividends many utilities companies pay,” MacDonald says. “By adding to those dividends with an active covered call option strategy, HUTL can deliver even more of the income and volatility offsets that investors often seek in utilities.”
A call option is a contractual agreement that allows the buyer the right, but not the obligation, to purchase a specific stock from the seller at a predetermined price (the “strike price”) within a specified period of time. In exchange for this option, the buyer pays a fee, or premium. The seller keeps the fee no matter what happens.
The ETF collects premiums from the buyers of these call options. This additional income from the covered call strategy helps enhance the monthly distribution yield, which means investors receive higher income payouts each month.
Note that the income from covered call options typically involves trading an element of market upside opportunity. If the market rises, the holder of the options contract will likely exercise their right to buy, and the ETF won’t benefit from some growth. To limit this trade-off, Harvest ETFs limits its options writing to 33% of portfolio holdings, and it practices active management to ensure that as much of the portfolio as possible is exposed to potential upside.
Investing in the utilities sector offers stability, consistent demand, attractive dividend yields and a shield against economic fluctuations and geopolitical uncertainty.
A utility ETF may be a good way to gain exposure to the sector’s bright prospects—even better if it’s diversified across industries and geographies, offers potentially lower fees, and generates higher income through a covered call writing strategy.
This is a paid post that is informative but also may feature a client’s product or service. These posts are written, edited and produced by MoneySense with assigned freelancers.
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