TFSA Investors: A Dull Dividend Stock That Could Make You Rich in a Recession

Risk-off investors ought to load up on Hydro One Ltd. (TSX:H) today before the market falls into a tailspin.

| More on:

In today’s volatile market, certainty comes at a premium. And no business provides greater clarity than those with stable, highly regulated cash flow stream that leaves little to no room for surprises, positive or negative.

Indeed, the appetite for risk taking has decreased in recent months, with some of the most boring stocks out there that are now seen as “sexy” through the eyes of investors. This current rotation into dull, stable stocks is a major reason why utilities like Hydro One (TSX:H) have been soaring, despite nothing fundamentally exciting happening at the company-specific level.

Hydro One is a controversial monopolistic play that’s been treading water since it hit the TSX index thanks to Ontario’s decision to privatize the firm. There was tremendous backlash over high rates in the province of Ontario and ever since Avista acquisition bid was denied, Hydro One has struggled to diversify into new, “growthier” geographies.

At this juncture, a U.S. expansion looks unlikely, leaving Hydro One at the mercy of a federal regulatory environment that won’t allow for much more than a “fair” rate of return. Hydro One is about as dull as it gets, with Ontario owning around a 47% stake in the electric transmission and distribution company.

While it will be difficult for Hydro One to outdo its peers in the space, I think the firm has a lot to offer risk-averse investors.

Being a monopoly comes with its perks.

Most notably, the company has a stable and highly predictable cash flow stream, which is seen as attractive for those investors who are caught between a rock (higher risk from equities) and a hard place (lower yields from bonds). In essence, Hydro One is a bond proxy or fixed-income alternative that can provide a bigger yield and the potential for consistent capital appreciation over time.

At the time of writing, Hydro One sports a 3.89% dividend yield, which is more handsome than the coupons of most bonds. And unlike fixed-income securities, Hydro One’s dividend is able to grow under any market environment, making the stock an essential holding in both good times and bad.

With a capital-investment plan, Hydro One has the capacity to deliver low to mid-single-digit earnings growth, which is meagre compared to most other stocks, but when compared to bonds, Hydro One starts to look like the perfect stock to own as the risk of recession rises.

As a stock, Hydro One gets an “F.” But as a bond proxy, Hydro One receives an “A+.” And with the rough market waters we’ve had to endure, it’s not a mystery as to why the stock has soared 30% over the past year.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

More on Dividend Stocks

analyze data
Dividend Stocks

Here’s Why the Average TFSA for Canadians Aged 41 Isn’t Enough

The average TFSA simply isn't enough for most Canadians in their early 40s. Here's how to catch up.

Read more »

cloud computing
Dividend Stocks

Insurance Showdown: Better Buy, Great-West Life or Manulife Stock?

GWO stock and MFC stock are two of the top names in insurance, but which holds the better outlook?

Read more »

concept of real estate evaluation
Dividend Stocks

How to Earn a TFSA Paycheque Every Month and Pay No Taxes on It

Canadian REITs can turn your TFSA into a monthly paycheque machine for life. Here's how Morguard North American Residential REIT…

Read more »

A plant grows from coins.
Dividend Stocks

The Smartest Dividend-Growth Stocks to Buy With $1,000 Right Now

New dividend-growth investors should consider CN Rail (TSX:CNR) stock and another top play if they're looking to build wealth over…

Read more »

Dividend Stocks

The 3 Top Canadian Stocks to Buy With $1,000 Right Now

If you want consistent income, look to consistent dividend payers. These three stocks are some of the best in the…

Read more »

A worker gives a business presentation.
Dividend Stocks

Want a 6% Average Yield? 3 TSX Stocks to Buy Today

These stocks pay good dividends that should continue to grow.

Read more »

chart reflected in eyeglass lenses
Dividend Stocks

Is Alimentation Couche-Tard Stock a Buy for its 0.9% Dividend Yield?

Couche-Tard stock's small yield is not enticing, but its growth potential could be a wealth creator.

Read more »

Hourglass and stock price chart
Dividend Stocks

5.2% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades!

With its 5.2% dividend yield, Toronto-Dominion Bank (TSX:TD) is a stock I'm eagerly buying.

Read more »