Outlook dims for utilities

Interest-sensitive stocks at risk as central banks become hawkish

Utilities are one of the safest ways to invest in the stock market. Until they’re not. Like now.

Utility shares are sometimes called the bonds of the stock market. That’s exactly how they behave. When interest rates rise, the share prices drop, just as bonds do. When rates fall, utilities stocks go up, as do bond prices.

I’ve often recommended utilities as a way to add enhanced income to a portfolio while reducing risk at the same time. The two Canadian companies with the longest history of consecutive annual dividend increases are Canadian Utilities Ltd. (TSX: CU) at 53 years and Fortis Inc. (TSX: FTS) at 52. Fortis is expected to increase its payout in November, which will put it at 53 years as well.

When you combine rising dividend increases with predictable income growth (utilities are regulated companies) and limited downside exposure, it’s clear why they have become key holdings in conservative, low-risk portfolios.

But to make them work most effectively, you must buy at the right time. I’m not a great believer in market timing, but this is an exception. Buying interest-sensitive securities when rates are on the rise is not a great idea.

In late July, the S&P/TSX Capped Utilities Index was at an all-time high of 421.92. Central banks were still standing pat despite concerns about high inflation. But long-term bond rates were moving higher, affecting mortgages, credit card rates, car leases, etc.

That process has accelerated. Central banks, including the Bank of Canada and the U.S. Federal Reserve Board, have responded by raising short-term rates.

No quick fix for high rates

The result is the highest long-term interest rates we’ve seen since 2002. And there is no quick fix in sight. We will be dealing with this problem for the foreseeable future.

Even though inflation has only been a top-of-mind concern since oil prices spiked after the start of the Iran war on Feb. 28, the damage it’s inflicted on stocks is significant. As of Oct. 1, S&P/TSX Capped Utilities Index was down 10.9% from the July high and is poised to go lower.

The prices of utilities stocks have reacted accordingly. Canadian Utilities shares were trading at $56.90 in late July. The shares traded recently at $50.99, down 10% since the July high. Fortis fell steeply from $83.75 in July to trade around $75 through August and September. It recovered in October, but at a recent $81, is still below its July high.

Higher rates are a double whammy for utilities. These companies carry a lot of debt, which adds to their costs when rates rise. Meanwhile, higher yields on safe government bonds decreases the attraction of dividend yields. That puts downward pressure on share prices.

It’s not only utility stocks that are at risk. Any interest-sensitive stock is experiencing the same problem. For example, the S&P/TSX Capped REIT Index has lost 11.4% since its July peak. The telecom sector is off 23.8%since March. Pipeline companies are also under siege; Enbridge shares are down almost 19% since late July.

The message is clear. This is not the time to buy “safe” stocks if they are exposed to interest rate risk. Unless you are heavily overloaded with them, I’m not suggesting you sell, as the cycle will turn again. But I would not advise buying more at this point.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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Notes and Disclaimer

Content © 2026 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

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