Why Fortis (TSX:FTS) Is the Best Dividend Stock to Hedge a Market Crash

Utility stocks like Fortis (TSX:FTS)(NYSE:FTS) can be highly effective in market downturns due to their less-volatile stock movements and stable dividends.

| More on:

Many investors don’t like utility stocks, mainly due to their slow stock movements. Utilities don’t even have a fancy business model or superior earnings growth to get excited about. However, I think utility stocks are super-effective when it comes to protecting against volatile markets.

Fortis (TSX:FTS)(NYSE:FTS) is one such utility stock that offers stability and an ability to outperform in uncertain markets. Let’s dig deeper into Fortis and see why it’s an apt pick for almost all market conditions.

Why Fortis?

Fortis operates in five Canadian provinces, nine U.S. states, and three Caribbean countries. In total, it serves almost 3.3 million customers. Almost two-thirds of its consolidated earnings come from the United States. The utility generates almost all of its profits from regulated operations.

These large-scale regulated operations facilitate stable and predictable earnings, which ultimately enable stable dividends. Notably, its earnings are not susceptible to business or economic cycles.

Stocks like Fortis generally play out well in bullish as well as in bearish markets. During the 2008 financial crisis, Fortis significantly beat the TSX Index. In the last 10 years, it has returned 120%, while the Canadian broader markets returned only 15%.

Indeed, that stands too low when compared to any other growth stock. However, stability and reliable dividends offered by Fortis are unmatchable.

Fortis generates almost 80% of its revenues from the residential segment, while the rest comes from the commercial and industrial segment. People use electricity and gas irrespective of the economic conditions, and that’s why utilities like Fortis are more well positioned to outperform in recessions.

Also, their stable dividends and less-volatile stock movements act as a hedge against market volatility.

Dividends and valuation

Fortis stock is currently trading at a dividend yield of 3.7%, marginally higher than TSX stocks at large. Apart from its premium yield, its dividend growth also higher in the last five years. Notably, it has increased dividends for the last 46 consecutive years.

Utilities normally pay higher portions of their earnings to shareholders in the form of dividends, and thus, they have higher payout ratios. Fortis’s average payout ratio comes around 62%, which indicates the safety and potential for future dividend growth.

Fortis stock tumbled to record lows during the COVID-19 crash. However, it was fairly quick to recover and outperformed in the subsequent rally. It is currently trading 20 times its 2020 earnings estimates. This does not look significantly stretched from the valuation perspective. Perhaps investors will take shelter more and more in classic defensives such as Fortis amid increasing broader market uncertainties.

Utility stocks may not be great options to create wealth in a shorter time, but, as I stated earlier, they will be highly useful during volatile markets. I think investors can consider allocating at least some portion of their portfolio to defensive stocks like Fortis.

Investors with only a couple of years to retirement or with smaller time horizons can consider putting in a higher portion of their investment into defensive stocks, while others with a bigger horizon can consider a smaller portion.

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 Vineet Kulkarni has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.

More on Stocks for Beginners

woman looks out at horizon
Stocks for Beginners

3 Beginner-Friendly Stocks Perfect for Canadians Starting Out in November

Are you looking for some of the best beginner-friendly stocks to line your portfolio? Here's a trio of picks to…

Read more »

up arrow on wooden blocks
Tech Stocks

The 3 Smartest Tech Stocks to Buy With $500 Right Now

Tech stocks can be seen as a bit risky, but these three have far less risk and more stability for…

Read more »

shopper buys items in bulk
Dividend Stocks

Where to Invest $7,000 in November

This consumer staples company provides consistent stock performance alongside a dividend.

Read more »

A worker gives a business presentation.
Stocks for Beginners

Is TMX Group Stock a Buy, Sell, or Hold for 2025?

There are a lot of items to consider when looking at TMX Group as an investment. Today, let's get into…

Read more »

man shops in a drugstore
Stocks for Beginners

3 Consumer Stocks That Canadians Need to Watch in November

Consumer staple stocks could turn these stocks even higher with the holidays coming up.

Read more »

a sign flashes global stock data
Stocks for Beginners

Safe Canadian Stocks to Buy Now and Hold During Market Volatility

Adding these two safe Canadian stocks to your portfolio now could make your portfolio more stable despite short-term market volatility.

Read more »

shopper chooses vegetables at grocery store
Dividend Stocks

Is Loblaw Stock a Buy for Its 1.2% Dividend Yield?

Loblaw stock may not have the highest dividend yield out there, but what does that really mean to today's investor?

Read more »

cloud computing
Tech Stocks

Best Stock to Buy Right Now: Manulife vs CIBC

Want the best stocks? These two are certainly the best options. But which is the better buy?

Read more »