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 utility stocks have nowhere to go but up.
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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 one of the largest electric utilities in the United States, controlling 12.77% of the electric utilities sector in the country. 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 $148 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 has made a strong recovery throughout 2020. In fact, in 2020, NextEra Energy’s stock price had grown more than 27% by the beginning of November.
That performance is especially compelling when you look at the utilities benchmark in the United States, the Vanguard Utilities ETF, which has been down most the year and has finally made a full recovery with year-to-date growth of about 2.5%. So, why is NextEra Energy largely outperforming the utilities sector as a whole?
There are a few competitive advantages to speak of.
First and foremost, NextEra Energy’s dominance as America’s electric utility provider is hard to brush off. With control of more than 12% of the electric utilities market 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. Most recently, the company reported its third quarter financial results. During the quarter, the company saw a 14.1% decrease in year-over-year revenue, but an 11.3% year-over-year increase in earnings per share, demonstrating the company’s ability to roll with the punches, even when electric utility demand is experiencing a downturn.
While NextEra Energy plays an integral role in the United States nuclear power market, it’s also a massive player in the United States 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 NextEra Energy has seen compelling growth in its stock price 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 price’s growth has led to a dividend yield of just 1.85% in an industry with an average dividend yield of 3.6% according to US News & World Report.
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.
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. The company currently trades with a market cap 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 water and wastewater section of the regulated utility 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 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.
American Water Works 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 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 offers a compelling dividend payout. 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, American Water Works 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 88.68%, it’s one of the highest payers in the utilities industry.
The company is an electric utility 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 continue to trade below pre-COVID-19 pandemic levels. Dominion Energy is not one of those companies. Trading with nearly 5% gains year to date, the stock is outperforming the utility sector as a whole.
This compelling performance isn’t coming to an end any time soon. 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 electric utility 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 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 (NYSE: 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 electric utility 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.
Like others on this list, Duke Energy has largely outperformed the Vanguard Utilities ETF, generating 7% growth year to date by November of 2020, more than double the Vanguard Utilities ETF returns.
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 the COVID-19 pandemic, 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 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.
As with others on this list, Brookfield Infrastructure Partners has largely outperformed the overall utility sector in terms of year-to-date growth. By November of 2020, the stock price had risen more than 50% and looks to be continuing on that trend.
Moreover, Brookfield Infrastructure Partners is consistently expanding, leading to consistent revenue growth.
At the same time, the stock offers a dividend yield of 2.94%. While this is lower than the average utilities sector dividend yield, the lower dividend is ultimately the result of dramatic stock 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.
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.
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 dividend payouts, 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.