There are plenty of investment opportunities on the TSX, but your resources are limited. Your portfolio returns depend on the stocks you pick. While picking stocks, the question arises as to which is a better buy. Something that may be good for one person may not be good for the other. With the right investing strategy, every stock can help you generate positive returns.
Decoding the dilemma of better buy
To help you solve this dilemma, we compare two equally good stocks on the returns and fundamentals. In this article, I will focus on factors influencing your investment decisions and whether the stock fits the criteria. But before I begin, here’s a brief overview of the two stocks.
Constellation Software vs. Canadian Utilities
Constellation Software (TSX:CSU) is a stock in a long-term growth trend. Buying a single stock will require you to shell out $3,632. However, you can get exposure to CSU’s stock price movement for just $55 by investing in iShares S&P/TSX Capped Information Technology Index ETF. The ETF has 25.5% of its holdings in Constellation Software.
Canadian Utilities (TSX:CU) is a dividend stock that has been growing dividends for a long term (51 years and still growing). You can buy shares of Canadian Utilities for less than $31 a share.
Both the above stocks are less volatile and have been growing steadily (stock price/dividends) for over two decades. The two companies have sailed through some of the worst economic downturns successfully. Constellation deals in the tech sector and Canadian Utilities in the energy sector. Having both in your portfolio can give you a good diversification of investments.
Which among the two is a better buy in February?
Three reasons Canadian Utilities is a better buy in February
If your objective is to invest in a Registered Retirement Savings Plan (RRSP) before February 29 to claim a tax deduction, consider investing in Canadian Utilities. The RRSP withdrawals are taxable. Hence, they are suitable for dividend stocks that give small quarterly payouts.
Another reason to choose Canadian Utilities over Constellation is if you are looking to earn a stable passive income. The utility stock is trading closer to its 52-week low, inflating its annual dividend yield to 5.9%. The company has slowed its dividend growth to 1%, which means its dividends are not inflation-adjusted like before.
And lastly, if your portfolio already has high exposure to tech stocks and a significant chunk is invested in Constellation Software, you better opt for Canadian Utilities. While Constellation is a strong growth stock, going all in on one stock invites concentration risk. A well-diversified portfolio needs stocks in different sectors that react differently to a situation.
Three reasons Constellation Software is a better buy in February
If your investment objective is to generate wealth in the long term through your Tax-Free Savings Account, consider investing in Constellation Software. This growth stock has generated a 20% compound annual growth rate (CAGR) in the last 10 years. The company is growing through acquisitions by reinvesting the cash flows of acquired companies.
Another reason to choose Constellation over Canadian Utilities is if your portfolio is too conservative, with large investments in bonds and dividend stocks. They do not appreciate your capital. Constellation is a low-volatility growth stock that is ideal even for risk-averse investors. It is called the Berkshire Hathaway of the tech sector, as the company buys software companies where it finds value.
And lastly, 2024 could see the stock market rebound in the latter half as the Bank of Canada begins interest rate cuts. Growth stocks tend to do well in a strong economy. As borrowing costs fall, many companies that paused tech spending due to business uncertainty could return to investing in tech, boosting cash flows for Constellation Software.
