Utility stocks — the traditionally boring and staid sector got a rude awaking this past year in the form of the Federal Reserve. Investors both large and small began fleeing the sector in fear of rising interest rates.
Conventional wisdom is that utility stocks are D.O.A as the Fed begins ratcheting up interest rates. For starters, their own borrowing costs will go up. After all, it takes a lot of debt to build-out a new natural gas plant or water line.
Secondly, as a high yielding sector, finding “safer” and similar high yielding substitutes become much easier to find in a rising interest rate environment. With this in mind, it’s no wonder the broad Utilities SPDR ETF (XLU) was down about 9% for all of 2015.
However, you may want to go against conventional wisdom and consider utility stocks for your portfolio while the sector is dirt cheap — the XLU can be had for price-earnings of only 13.
This tightening cycle isn’t expected to be severe by any means: Dividend increases from the sector will counterbalance the slight increase in rates, while growth from non-traditional sources will help utility stocks power through.
With that in mind, here are three utility stocks to buy today.
Utility Stocks to Buy Now: ITC Holdings (ITC)
Dividend Yield: 1.9%
The key for utility stocks in the age of rising rates, is the ability to grow dividends. That shouldn’t be a problem for ITC Holdings (ITC).
ITC doesn’t actually generate electricity, but it owns the transmission and grid network that other utilities use to get that electricity into your home. In fact, it’s the largest independent transmission network operator in the United States — owning much of the grid in the South and Midwest. That’s a very profitable place to be.
Think of ITC as a crude oil pipeline firm simply collecting rent and tolls as others send power down its lines.
And as a solely logistics infrastructure focused firm, ITC has been a profit machine, with the latest quarter seeing a 26% jump in earnings.
The earnings and dividend increases could keep coming for this utility stock. Rising wind and solar power generation in its main operating areas is helping ITC drive up rates. Plus, as a FERC-regulated body, ITC has been able to win most of those increases.
What that means for investors is that ITC could be one of the best utility stocks out there to buy.
Utility Stocks to Buy Now: NextEra Energy (NEE)
Dividend Yield: 2.96%
NextEra Energy (NEE) could be exactly what investors in utility stocks are looking for — the right combination of growth plus stability and income.
To start, NEE has around 44,900 megawatts of generating capacity that provides electricity to consumers across 27 states. This includes being the largest utility in Florida and Hawaii. That huge operating footprint and customer base provides NEE with plenty of profits and cash flows to fund its growing 2.96% dividend.
There’s the stability and income part of NEE stock.
The growth comes from a huge focus on renewable energy. NextEra is the world’s largest generator of solar and wind energy by a wide margin. There is almost zero future carbon regulation risk at the utility.
What’s more, NEE is getting a tad more “oomph” out of these renewable energy megawatts by stuffing them into its YieldCo NextEra Energy Partners LP (NEP). Using NEP, NextEra raises cheap capital from investors and receives some pretty hefty tax-advantaged dividends from in the process. Its adoption of smart metering technology also hasn’t hurt growth.
Renewables plus tried-and-true standard generation operations make NextEra a great choice of investors looking at utility stocks.
Utility Stocks to Buy Now: Consolidated Edison (ED)
Dividend Yield: 4.04%
As the saying goes — if you can make it in New York City, you can make it anywhere. Well, utility Consolidated Edison (ED) has been making it in New York for over 180 years.
The multi-utility serves as the supplier of electricity, steam and natural gas for metropolitan New York. That covers over 3.3 million electricity customers as well as another 1.1 million using its gas service. The key is the word “supplier.” Like ITC before it, the vast bulk of ED’s assets are in distribution, not generation.
That position as the major distribution utility for arguably the biggest city in the country does have its perks — for starters, access to New York’s resilient economy and the steady demand that entails. Basically, there is no substitute for using Con Ed’s services if you want to heat your apartment or power your business’ laptop within the cities limits.
For investors in utility stocks, that provides a sturdy stream of cash flows, profits and a current 4.04% dividend yield. In fact, ED has been able to continually raise its dividends for the last 41 years as a result of its New York monopoly.
But ED isn’t just boring — it does have some avenues for growth. Namely, renewable energy assets and unregulated utility businesses that should keep the dividends humming along.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
