Utility stocks are generally made up of companies that generate electricity, natural gas, or provide water or sewage services. They tend to be big, established names with large market capitalizations—no penny stocks here!
Why focus on the top utility stocks? Historically, utility companies have been less volatile than the overall market and have also offered steady, sizeable dividend yields. That’s thanks to the fact that these companies tend to be heavily regulated, but regulated in a way that ensures investors always get some profit out of it as well.
While investors could buy an ETF containing a mix of utility names, some of the best stocks offer advantages over buying the index as a whole. Here are the top stock picks for the utility space:
Best Utility Stock #1: Duke Energy (DUK)
Serving over 7.8 million customers in six different states in the Southeast and Midwest, Duke Energy is the best-known utility company on the market. It provides electric utilities and infrastructure, gas utilities, and even some renewable energy facilities.
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Shares are down about 9 percent over the past year. Earnings have grown at a modest 4 percent, and revenue has slipped about 3.5 percent. While that paints an overall flat growth picture, the utility has been a steady player in the space, and has been able to generously reward shareholders.
Duke Energy recently upped its dividend to $3.86 annually from $3.76. The company has raised its dividends for 14 years in a row, and has paid dividends for 94 years. While the dividend growth rate may change or the company may not increase its dividend in a tight year, that long-term uptrend in dividend growth is likely to continue.
Best Utility Stock #2: NextEra Energy (NEE)
NextEra Energy, formerly FPL for Florida Power and Light, is an electric utility that serves 10 million customers on the coasts of Florida, one of the fastest growing regions in the nation. That means this utility play will likely see above average growth for years to come as Florida’s population increases thanks to a favorable climate, job opportunities, and the state’s lack of an income tax.
Unsurprisingly, the utility has done better than stocks in the past year, with a 24 percent rally against a 6 percent rally for the market as a whole. And with a 13 percent increase in revenue in the past year, the utility still has some long-term gains ahead, in every metric from customers to cash flow.
However, with a growing service population, the company does have to spend more on its network, including hardening infrastructure against disasters like hurricanes. That’s kept earnings down in the past year.
Currently, NextEra Energy shares yield $5.60 annually, up from $5.15 the year before, for a 2.2 percent dividend yield.
Best Utility Stock #3: Southern Company (SO)
A natural gas utility, Southern Company has a number of gas pipeline services in addition to power generating stations including nuclear, wind, hydroelectric, solar, and fossil fuel ones. The company also has a digital wireless communication service as well, giving it a telecom-like utility.
All in all, the company services 8 million customers across four states. The past year has been tough for the utility, with a revenue drop of 7 percent and an earnings drop of 58 percent. Nevertheless, thanks to the company’s strong position and dividend yield, shares are down a mere 5 percent and a rebound in earnings is likely.
Currently shares yield 4.8 percent, following an increase in the annual dividend by 8 cents over the prior year. That’s a solid yield for most markets, and with a 75 percent payout ratio after the company’s lower earnings, the dividend looks safe from a cut at this time.
Best Utility Stock #4: Essential Utilities (WTRG)
Formerly Aqua America, Essential Utilities operates regulated utilities that provide water and wastewater services. It serves approximately 3 million customers. Its operating area includes highly-populated states such as Texas, Ohio, Pennsylvania, Virginia, and New Jersey among others.
Shares of this water utility have been trading flat in the past year. That’s in line with the overall stock market. But with a 27 percent profit margin and strong earnings and revenue growth of 206 percent and 27 percent in the past year, this utility looks like an attractive growth play.
The company pays out a 94-cent dividend, which comes out to 2.2 percent per year. With the recent name change from Aqua America and ticker change that came with it, the new company technically doesn’t have a dividend history. However, the prior company has a solid history of making regular dividend payments with small incremental increases along the way.
Best Utility Stock #5: Alliant Energy (LNT)
Based out of Wisconsin, Alliant Energy also serves customers in Iowa, Minnesota, and Illinois, making for a play on the Midwest. The company also owns a regional railway, as well as freight and logistics services. It has traditional fossil fuel stations, as well as a renewable energy source in the form of a solar farm.
Having some non-utility divisions appears to be good for the bottom line, as the company has seen its earnings rise by 36 percent in the past year. And profit margins are 17 percent, a healthy level for most companies but great for a heavily regulated utility.
Shares currently yield 3.1 percent, and the dividend was just increased from $1.45 per share annually to $1.52. The utility sports a payout ratio of just 57 percent of its earnings, which makes it look far more attractive in terms of being able to weather an economic downturn.
Best Utility Stock #6: PPL Corp (PPL)
PPL Corp acts as a holding company serving customers in Pennsylvania, Kentucky, and the United Kingdom. The company primarily delivers electricity and natural gas, generating electricity from coal, gas, hydroelectric and solar sources.
As a player in multiple countries, PPL Corp offers some international diversification to any investment portfolio. It does so while also offering a utility with some modest growth and reasonable profit margins.
The company saw earnings rise by 19 percent in the past year and profit margins rise by 24 percent. While utilities tend to trade at price-to-earnings ratios in the 20’s or higher, typically at a slight premium to the market, PPL Corp trades at around 10 times earnings, making for a relative value play in today’s market as well.
On the dividend front, PPL is a relatively high payer with a 6.5 percent yield. The company makes up for this relatively high yield with low yield growth. That’s seen in the bump from $1.65 to $1.66 in the past year.
Best Utility Stock #7: American Water Works (AWK)
One of the larger water players on the market, American Water Works serves over 3.4 million customers across 1,700 communities in 16 states. It operates over 520 water treatment plants, and also has over 52,00 miles of water mains and pipes to maintain.
As one of the biggest players in the industry, it’s also one of the best known. Shares are up 15 percent in the year, nearly tripling the S&P 500 over the same time. And with a 17 percent profit margin, it’s clear that water is a solid business to be in.
AWK also recently upped its dividend by a full 10 percent, from $2.00 even to $2.20. With the high share price, however, the stock yields just 1.65 percent. As the company’s payout ratio is just 57 percent, however, investors are betting on further jumps on the dividend in the future.
Best Utility Stock #8: Excelon Corp (EXC)
A player in fossil fuels, natural gas and renewable energy, Excelon operates in the United States and Canada. Why so far down on the list? Simply put, it’s less profitable than other utilities at the moment.
Profit margins came in at 7.75 percent last year. Revenue growth slid 7 percent, and earnings dropped a whopping 35 percent. Shares took this all in stride, dropping nearly 25 percent over the past year.
But that’s last year. And if the company can increase its profit margins and get back to growth, then shares will likely reward investors with some solid capital gains in the years ahead. The drop in shares has pushed the dividend yield up to 4.1 percent, aided in part by a six-cent increase in the annual dividend compared to a year before.
All in all, this is an out-of-favor play in the utility space right now, and those can be rewarding when their valuation surges on an earnings rebound.
Best Utility Stock #9: Brookfield Renewable Partners (BEP)
Here’s a truly international play. Based out of Bermuda, this investment partnership generates 19,000 megawatts from wind, solar, biomass and hydroelectric sources across North America, Brazil, Europe, India and China.
The company’s partnership structure is a bit different than traditional utilities, but it means that the company has to pay out the majority of its earnings to the holders of shares.
That’s enough to push the yield up to 4.4 percent, making for a reasonably high dividend stock. The company has a policy of looking to raise its dividend payout ratio by at least 5 percent annually, so as a dividend growth play, this company looks truly impressive for long-term investors.
The stock price is also up 36 percent in the past year, showing that capital gains matter as well. Despite that overall return, shares are still well below highs set back before the market meltdown in March, so there’s room for further capital gains on this unique, international investment in the utility space.
Best Utility Stock #10: NRG Energy (NRG)
NRG is another massive utility play, with over 3.7 million customers across a number of Northeastern states. The company generates electricity from natural gas, coal, oil, solar, nuclear and even uses battery storage.
That’s a nice mix. However, as with many other utilities right now, business is off compared to a year ago. The company’s earnings and revenues are down, but on the plus side, the utility does sport a hefty 42 percent profit margin on the earnings it does have. That’s a great spot to be in.
The company just made a massive dividend increase as well, from $0.66 to a full $1.20, nearly a full doubling of the payout. That’s pushed the dividend yield from 2 percent to 3.6 percent, more in line with the utility space as a whole.
Shares are down 7 percent over the past year, so there’s likely another opportunity for investors here to see a solid return over the next few years from both dividends and capital gains.
Are Utilities a Good Stock Investment?
Usually, yes. However, it depends on your investment outlook. If you’re looking to build wealth quickly, utility shares are slow-growth names that are mostly owned for their dividends. For growth investors, investing in the space makes little sense, except as an investment strategy involving diversification.
If you’re looking for steady, or even slightly rising, income, then the utilities sector is a great place for you to invest in. You can even start with an ETF to get acquainted with the space.
Are Utility Stocks Defensive?
Yes. As a sector, utilities stocks are less volatile than the rest of the market, and the steady dividend income provides useful ballast to an investment portfolio that may be bracketed by big swings in other sectors, especially in a bear market. That’s why they sometimes have their day on Wall Street, where the investment advice often swings defensively when the market is down.
However, some utilities are in growing parts of the country, so look for a favorable demographic trend when making stock picks and investing in the space.
Do Utility Stocks do Well in a Recession?
In a recession, most stocks will decline in value. Utilities are no exception. However, the utility sector will tend to decline less during a recession, just as they tend to rise less during a boom compared to, say, tech stocks.
In a market selloff, utility stocks tend to reach historically high dividend yields, making them an optimal buy as well for when there’s a rebound in shares. Investing during a recession when prices are down and yields are up makes shares worth buying, whether with individual stocks or an ETF.
Why do Utility Stocks Pay High Dividends?
A utility stock tends to be a mature company. Its high-growth days are long behind it. The power generation of water utility network has long been built out. So while capital is needed to maintain and upgrade the utility, there’s also ample leftover income to reward shareholders with dividend payments.
Historically, utilities have paid out dividend yields higher than the average of the overall market, and compared to today’s low interest rates, they’re a safe sector of the market for someone who usually invests in bonds.