Utilities are one of the most basic cornerstones of civilization as we know it. They are the reason lights turn on when you flip a switch, water flows when you turn a faucet handle, and your gas stove has flame when you turn a knob. Without utilities, life simply wouldn’t be the same.
As a cornerstone of civilized society, just about everyone uses utilities. This popularity also means they’re a big-money business. Because there’s a fundamental need for utilities that grows as the population grows, there’s a strong argument that many utility stocks have nowhere to go but up.
7 Best Utility Stocks to Buy
No matter what sector you plan on investing in, there will always be winners and losers. Of course, you want your money invested with a company that’s going to grow and generate strong returns. Here are several compelling stocks to buy if you’re looking for exposure to utility companies.
1. NextEra Energy (NYSE: NEE)
NextEra Energy is the largest regulated electric company in the United States according to its website. The company’s claim to fame is its Florida subsidiary, Florida Power & Light, or FPL. Nonetheless, Florida isn’t the only region where you’ll find the company’s utility services. In fact, by providing electric utilities across the country, the company has grown to boast a market capitalization of more than $158 billion.
Like many in the utilities sector, NextEra Energy stock saw high volatility and painful declines as the COVID-19 pandemic began to spread around the world. Unlike its peers, it made a strong recovery throughout 2020 before gains tapered off through the first half of 2021, lending a hand to the undervaluation argument.
The company has a few competitive advantages to speak of.
First and foremost, NextEra Energy’s dominance as America’s electricity provider is hard to brush off. Being the largest metered electric utilities company in the United States, you or someone you know is likely receiving services from the company or one of its many subsidiaries.
This dominance has led to a strong performance leading up to and during the coronavirus pandemic, allowing the company to deliver strong results quarter after quarter. In the most recent quarter, earnings came in at $0.13 per share, which isn’t bad when you consider that just last year, NEE produced losses as it struggled through COVID-19-related headwinds.
However, the company is clearly making a strong recovery, with year-over-year revenue growth sitting at 16.6%. The company also went from losses to profit, moving from a loss of $3.39 per share in the first quarter of last year to a profit of $2.66 per share in the first quarter of this year.
While NextEra plays an integral role in the U.S. nuclear power market, it’s also a massive player in the U.S. renewable energy market. As a result of the company’s early adoption and strong investments in the renewables space, it has become the largest generator of solar and wind energy in the world.
That’s a fact that bodes well with investors considering the shift to clean energy and the fact that a proponent of this shift, Joe Biden, recently won the 2020 presidential election.
Although the company saw compelling growth in its stock throughout the first three quarters of 2020, dividend increases have lagged behind stock price increases, leading to a relatively low dividend yield among utility stocks. The stock’s growth has led to a dividend yield of just 1.86% in an industry with average dividends of 3.7% according to Dividend.com.
Regardless of the fact that NextEra Energy isn’t the best dividend paying stock in the utility sector, it is clearly one of the best investment opportunities in the space. The COVID-19 pandemic has been painful for everyone, but it has proven that the company has the ability to grow even in adverse market conditions.
Moreover, with the company’s leadership in the clean energy space and overall dominance in the U.S. electric utilities market, more growth is likely ahead. All in all, NEE is one of the best stocks in the space.
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2. American Water Works (NYSE: AWK)
As its name suggests, American Water Works is a water utility company, and it’s the largest publicly traded company in the United States that provides such services, according to IG. The company currently trades with a market cap of more than $32 billion, which has grown relatively consistently during the past decade from around $5 billion.
The vast majority of the company’s revenue comes from regulated water and wastewater services it provides to locations ranging from residential homes to commercial real estate and military bases.
The company’s leadership in the water and wastewater section of the regulated utility industry has led to compelling growth that the company’s management team believes is going to continue for the foreseeable future. Its management is so confident in the company’s ability to continue its impressive growth that it publicly announced it’s expecting a compound annual growth rate of between 7% and 10% between the years 2020 and 2024.
If American Water Works can achieve the high bar it has set for itself, it will be one of the fastest growing utility companies, publicly traded or otherwise, in the world. This begs the question: “How is the company going to achieve this goal?”
The company has been spending a massive amount of money. In recent years, it has made a multibillion-dollar investment to expand its regulated water operations. The investment is a smart move. By expanding its infrastructure, American Water Works now has the ability to bring something everyone needs — clean water — to a large new audience.
The company isn’t going anywhere any time soon. Coronavirus, economic recession, geopolitical tensions, election uncertainty, and a slew of other factors that tend to weigh heavily on the stock market generally have little bearing on this particular company. Everyone needs water regardless of how fast the coronavirus is spreading, which president is in office, or whether there’s war or peace.
This consistent demand has led to tremendous growth over the years and will likely lead to further growth ahead. American Water Works enjoys a solid credit rating and appears to be in a financial position to continue delivering consistent performance.
Finally, the stock comes with a compelling dividend. Historically, the company has paid investors back 50% to 60% of earnings per share. It’s expected that this trend will continue. In fact, the company already said that it expects dividend growth of 7% to 10% per year through 2024.
With a monopoly on water in many locations, recent massive investments to expand its already impressive base of consumers, strong dividend growth, and a natural shield from a wide range of investing risks, AWK is a regulated utility that fits into just about any investing portfolio.
3. Dominion Energy (NYSE: D)
Dominion Energy isn’t just a stock that has shown consistent growth over a long period of time, it’s a massive dividend payer. With a dividend payout ratio of over 71%, it’s one of the highest payers in the utilities industry. Not to mention Dominion has a long history of leveraging its strong balance sheet to maintain dividends, even in quarters where earnings don’t make the cut, using financial strength from the best performing quarters to keep investors happy during less impressive quarters.
The company is an electricity provider with services in Virginia, North Carolina, and South Carolina. The company also provides natural gas utility services to customers in Utah, West Virginia, Ohio, Pennsylvania, North Carolina, South Carolina, and Georgia.
There’s a lot to be said about the company’s performance following a short-lived COVID-19 selloff in utilities. Some stocks in the space continued to trade below pre-COVID-19 levels throughout 2020. Dominion Energy isn’t one of those companies.
After a stellar performance throughout most of 2020, during which time the company clearly outpaced the market, the value of the stock began to taper off as 2021 rolled in. Nonetheless, recent declines create a potential opportunity as an undervaluation argument becomes more and more valid.
The COVID-19 pandemic plays a big role in the opportunity here as well. The Federal Reserve is maintaining record-low interest rates in hopes of spurring lending and economic activity. As a result, several investors are looking for strong dividend stocks with a history of stability through tough economic conditions. Dominion Energy fits that bill to a T.
How has the company done well in tough economic times?
How long are you willing to go without air conditioning in the summer and heating in the winter months? The company provides metered electricity services, a valuable offering, in high demand, with a massive audience. While consumers spend less time out of their homes during tough economic situations, staying home generally comes with increased energy costs, which bodes well for Dominion Energy.
With a high dividend payout ratio, dominance in the provision of electricity and natural gas in various states, protection from economic hardship, and its position as a potential safe haven in a low interest rate investing environment, Dominion Energy is a stock that’s well worth your attention.
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4. Duke Energy (NYSE: DUK)
Duke Energy is another stable dividend play that could end up benefiting from the long-term low interest rate environment set in place as a result of the COVID-19 pandemic. The company made its name by providing electricity and natural gas to customers in the southeastern U.S. Today, the company serves more than 7 million customers across several states.
As an electric and natural gas play, Duke Energy comes with the same economic hardship protection that you’ll find with others in the utilities space. You need energy to live a comfortable life, making the stock a relatively safe play regardless of economic climate.
At the same time, Duke Energy is another company with strong growth in revenue and earnings, leading to great dividends. The company has a dividend payout ratio of 71.19%, meaning that investors take home a decent chunk of profits while also providing a little wiggle room for future dividend growth.
With the economic hardship shield that the company’s products provide, combined with a high dividend, Duke Energy is becoming a top choice among those looking for safe investment options.
It’s also worth mentioning that the stock has had a stellar first half of 2021, clocking gains of more than 14% by mid-June, but those gains have tapered. As a result, there’s a strong argument that the stock is heavily undervalued and primed for a recovery.
With a strong history of dominance in the regions it serves, consistent growth in revenue, earnings, and dividends, a natural economic shield, and a strong year-to-date performance, even in the face of COVID-19, Duke Energy stock is one for the books.
5. Brookfield Infrastructure Partners (NYSE: BIP)
Brookfield Infrastructure Partners isn’t quite what most people imagine when they think of utilities. The company has a diverse infrastructure portfolio that keeps utility companies alive. It operates cell towers, data centers, railroads, and ports. It also owns a network of pipelines through which natural gas flows.
Infrastructure is a big-money business, and a stable one at that. Not only is the company generating more than $6.5 billion in revenue annually, nearly 95% of its cash flow is regulated or under contract, offering an all but guaranteed return.
As with others on this list, Brookfield Infrastructure Partners has largely outperformed the overall utility sector in terms of year-to-date growth. By September 2021, the stock price had risen more than 12%.
Moreover, Brookfield Infrastructure Partners is consistently expanding, leading to consistent revenue growth.
At the same time, the stock offers a dividend yield of 3.57%. While this is slightly lower than the average utilities sector dividend yield, the lower dividend is ultimately the result of dramatic share price appreciation, making it a compelling growth play that also pays dividends.
As Brookfield Infrastructure Partners continues to benefit from previous investments made in utility-related infrastructure, while maintaining a focus on investing for future growth, the stock is likely to continue in the upward direction.
6. AES Corp (NYSE: AES)
AES Corp is a different type of company than others you’ll find on this list. Sure, it’s a utilities company. Yes, it pays dividends, and it’s a key player in energy infrastructure, but that’s where the similarities stop.
The companies listed above are all U.S. companies serving a largely, if not completely, American audience. On the other hand, AES is an American international energy provider that only produces about 36% of its revenue in the U.S. Instead, the company’s global focus has expanded its horizons, giving it an impressive presence in areas like Mexico, Central America, and Eurasia.
Most of the company’s more than $9.6 billion in annual revenue comes from emerging markets, adding to potential risk, but greatly enhancing return potential.
Another big difference between AES and other energy and utility companies is the way it sells the energy it produces. Instead of providing utilities directly to the consumer, it generates revenue from its energy assets through contracts with other companies that deliver services to the consumer. About 70% of these are long-term contracts, setting up sustainable revenue for the foreseeable future.
With a dividend yield of 2.54%, the stock isn’t necessarily turning heads of income investors, but it does provide reliable income that increases consistently on a year-over-year basis. This, combined with the increased growth potential due to the company’s activities in emerging markets, makes the stock a hard one to pass up.
Moreover, as consumers, corporations, and government bodies around the world pay closer attention to the environmental impact of energy production, the company is working to make a big change. By 2024, the company intends to produce at least half its power using renewable methods like solar panels and wind turbines. This will likely bode well for the stock considering the change in tides in terms of environmental awareness.
All in all, AES has a unique business model compared to others in the utilities sector. This model does come with increased risk, so it’s not going to be the right stock for every investor. However, for those willing to take on moderately higher risk in exchange for the potential to outpace the sector, the stock is an attractive play.
7. NRG Energy (NYSE: NRG)
NRG Energy is the riskiest play on this list by far, but if you’re interested in a high-risk, high-reward stock with some potential, this may be just what you’re looking for.
The company has a bit of a checkered past.
In 2003, the company filed bankruptcy after its unorthodox approach to the provision of utilities failed. In 2013, following the bankruptcy, the company purchased a merchant power business at the same time that it started the buildout of renewable energy infrastructure.
These businesses failed as well.
In 2017, the merchant energy business filed bankruptcy followed by the selloff of the company’s renewable energy assets in a bid to raise funds.
Notwithstanding the company’s past, the company of today seems to be onto something with yet another unorthodox approach to energy. Most energy utility companies in the U.S. are in control of government-granted monopolies that give consumers little by way of choice and price competition.
NRG isn’t one of those companies.
Instead, the company operates in regions where consumers have choices, and it works to provide the lowest price to those consumers. Sure, the monopoly companies own the power lines, but the energy that runs through the lines in the areas the company serves — mainly Texas and the Northeast — can be sold by third parties.
The business model seems to be working, as the company is well into positive earnings territory and offers an meaningful dividend yield of 2.97%. Moreover, because its segment of the market is growing, the potential for price appreciation ahead is more impressive than that of most slow-growth utilities companies.
The bottom line here is that the company has had some hard times in the past, and it’s worked to bounce back each time. However, the company hasn’t produced an annual loss since 2017 and is on pace for continued growth. While betting on the underdog in the stock market can be a risky venture, this seems to be an underdog that’s ready to outperform.
The utilities industry is a fascinating one. These companies capitalize on some of the most basic human comforts — electric utility services that light your home and keep you cool in summer, regulated water utility services that keep clean water on tap, and gas utility services to keep your stove and fireplace running are all big businesses.
The companies that serve customers in the massive and consistently growing utilities industry are known for strong dividends, generating compelling growth, and being relatively safe investments. Nonetheless, always keep in mind that any investment comes with risk, and not all stocks in any sector are created equal.
Do your research and make educated investment decisions to help ensure that your investments result in the growth of your wealth and financial stability.
Disclosure: The author currently has no positions in any stock mentioned herein nor any intention to hold any positions within the next 72 hours. The views expressed are those of the author of the article and not necessarily those of other members of the Money Crashers team or Money Crashers as a whole. This article was written by Joshua Rodriguez, who shared his honest opinion of the companies mentioned. However, this article should not be viewed as a solicitation to purchase shares in any security and should only be used for entertainment and informational purposes. Investors should consult a financial advisor or do their own due diligence before making any investment decision.