Utilities are one of the most basic cornerstones of civilization as we know it. They are the reason that 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 that they are a big-money business. Because there is a fundamental need for utilities that grows as the population grows, there’s a strong argument that many companies in the utilities industry have nowhere to go but up.
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5 Best Utilities Stocks to Buy in 2020
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 five strong picks in the utilities space to consider.
1. Exelon Corporation (EXC)
Founded in October of 2000, Exelon is relatively young. Nonetheless, what it lacks in age, it makes up for in size. As one of the largest publicly traded utilities companies in the United States, the company generates more than $35 billion in revenue annually. The company also employs more than 30,000 people.
As with most utilities companies on the market, Exelon took a big hit when the coronavirus pandemic took hold. As a result, the stock is still down more than 20% from its 2020 highs so far, lagging quite a bit behind the recovery seen across the sector.
Although some may look at that fact as a hindrance, it may prove to be an opportunity. There’s a strong argument building that utilities companies are coronavirus pandemic winners. After all, with lockdowns, the average consumers’ energy consumption is likely to climb — no more turning off the air conditioner while at work, lights are being used all day long, and other energy-sapping devices are taking center stage in work-from-home life.
Investors see the value in utilities companies post-pandemic too. This can be seen by in the vast majority of companies in the space, which have already recovered fully. The fact that Exelon Corporation is slow to recover suggests that investors can enjoy a discount seldom seen in the utilities industry.
Exelon Corporation also represents a strong dividend-income play. At the moment, the investment comes with a dividend yield of 4.4%. With the average dividend yield in the utilities space coming in around 3%, a 4.4% dividend yield is attractive.
The strong dividend yield is the result of consistent growth in revenue and net earnings from operations. The trend in these key metrics is not likely to reverse, suggesting that the company’s strong history of returning value to investors will only continue.
Although Exelon Corporation has been relatively slow to recover from the COVID-19 downturn that took place in early 2020, the stock is one to pay close attention to. The slow recovery offers a rare opportunity to invest in a discounted company with a strong history of revenue, earnings, and dividend growth. What more could an investor ask for?
2. American Water Works (AWK)
As its name suggests, American Water Works makes its money from water services, and it’s the largest publicly traded company in the United States that does so. The company currently trades with a market capitalization of more than $27 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 regulated water and wastewater industry has led to compelling growth that American Water Works believes is going to continue for the foreseeable future. The company is so confident in its ability to continue its impressive growth that it publicly announced it is expecting a compound annual growth rate of between 7% and 10% between the years 2020 and 2024.
If American Water Works can achieve this 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 American Water Works 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 seems like 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.
American Water Works isn’t going anywhere any time soon. Coronavirus, economic recession, geopolitical tensions, 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 what virus is spreading, which president is in office, or whether there is 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 solid financial position to continue delivering consistent performance.
Finally, American Water Works is a great dividend payer. 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 some 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, American Water Works fits into just about any investing portfolio.
Pro tip: If you’re going to add utility stocks to your portfolio, make sure you choose the best possible companies. Stock screeners can help you narrow down the choices to companies that meet your requirements. Learn more about our favorite stock screeners.
3. Dominion Energy (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 86.3%, it’s one of the highest payers in the utilities industry.
The company makes its money by supplying energy services to consumers in Virginia, North Carolina, and South Carolina as well as natural gas 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 continue to trade below pre-COVID-19 selloff levels. Dominion Energy is not one of those companies, trading about even with its pre-selloff levels.
Although there’s not much opportunity left in the recovery, as there may be with Exelon, there’s plenty to look forward to ahead. Not only has Dominion Energy had stellar historical performance, it’s quickly becoming a top pick given the current economic climate.
With a resurgence of COVID-19 cases taking place, Americans continue to stay at home, spending less and saving more. It’s too early to tell what economic impact the pandemic will have, but what we do know is that the Federal Reserve is already bracing for a big hit, maintaining record-low interest rates in hopes of spurring lending.
This doesn’t bode well for traditional safe-haven investments. As a result, several investors are looking for stable dividend stocks, or stocks that are known to provide strong dividends and have a history of stability through tough economic conditions. Dominion Energy fits that bill to a T.
How has Dominion Energy 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 energy, a valuable commodity, to 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 such 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.
4. Duke Energy (DUK)
Duke Energy is another stable dividend play that could end up benefiting from the low interest rate environment set in place by the COVID-19 pandemic. The company made its name by providing electricity and natural gas to customers in the southeastern United States. Today, the company serves more than 9 million customers across several states.
As an electricity and natural gas play, Duke Energy comes with the same economic hardship protection that you’ll find with Dominion Energy, American Water Works, and others in the utilities space. You need energy to live a comfortable life, making Duke Energy 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 73.5%, 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 Duke Energy’s products provide, combined with a high dividend payout ratio and impressive dividend yield, Duke Energy is becoming a top choice among those looking for safe investment options.
There’s also the added benefit of timing. Like most publicly traded companies in the utilities space, Duke Energy stock took a hit when the COVID-19 pandemic took hold. However, the company has yet to fully recover.
Prior to the pandemic, Duke Energy traded at more than $101 per share. Today, the stock is trading around the $85 range, offering up quite the discount if you want to bank on a recovery in this historically resilient company.
With a strong history of dominance in the regions it serves, consistent growth in revenue, earnings, and dividends, a natural economic shield, and plenty of room left in its COVID-19-related recovery, Duke Energy stock is one for the books.
5. Brookfield Infrastructure Partners (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 utilities 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 Brookfield Infrastructure Partners generating more than $6 billion in revenue annually, nearly 95% of its cash flow is regulated or under contract, offering all but a guaranteed return.
The company has made up most of its losses since the beginning of the coronavirus pandemic, so it’s too late to bank on its recovery. Nonetheless, there’s a lot to look forward to here. Brookfield Infrastructure Partners is consistently expanding, leading to consistent revenue growth. At the same time, the stock offers a dividend yield of 4.53%, making it an attractive dividend play.
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.
The utilities industry is a fascinating one. These companies capitalize on some of the most basic human comforts — electricity that lights your home and keeps you cool in summer, clean water on tap, and gas 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 paying 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.
Are you considering investing in the utilities sector? What are your favorite companies in this space?
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.