Utility stocks are unusually risky these days. Valuations are well above average, as they’ve become a refuge for income investors squeezed out of low-interest bonds. That’s dangerous over the long haul, but a recent sector downturn and the punishing heat wave should get utilities back to their outperforming ways.
Utility stocks are supposed to be poky dividend payers. Low volatility, widows and orphans — that sort of thing. And yet, the sector has been on a tear. The Utilities SPDR (ETF) (NYSEARCA:ULX) is up almost 15% for the year-to-date. At the same time, however, the sector’s price-to-earnings multiple is about 26% above its long-term average, according to S&P Capital IQ‘s chief strategist.
But some of them still have charm. As long as rates stay unusually low — which they’ll still be even after the next rate hike — yield-hungry investors are going to prop utilities up. They can pull back, on a hike, but they’re unlikely to crash.
And then there’s the best reason to own utility stocks right now: The heat wave afflicting much of the country. Record temperatures mean air conditioning has never been more necessary, and so utility bills are breaking the bank.
Some sector names are more reasonably priced than others and some look poised for better performance. Here are three of the best utilities stocks to buy.
Utility Stocks to Buy: Consolidated Edison, Inc. (ED)
Dividend Yield: 3.57%
Consolidated Edison, Inc. (NYSE:ED) serves the New York City area that has been stuck in a heat wave for much of the summer. With heat indexes regularly topping 100 degrees, ED is doing all it can to keep up with demand.
Like the rest of the sector, ED has cooled off since topping out in July, but it recently reversed trend. The selloff also made the valuation a bit more appealing.
With an admittedly lofty valuation of 18.7 times forward earnings, ED is by no means a bargain. It does, however, offer a 15% discount to the sector average.
Utility Stocks to Buy: Dominion Resources, Inc. (D)
Dividend Yield: 3.75%
With a presence in Virginia and North Carolina, Dominion Resources, Inc. (NYSE:D) serves some of the hardest hit communities in the heat wave. Charlotte, NC is sweltering with triple-digit heat indices and dew points in excess of 70%.
D reversed trend after the sector selloff and recently overcame its 50-day moving average. As for the payout, it’s due to go ex-dividend at the end of the month.
Like ED stock, Dominion Resources trades at a discount to the sector average on a forward earnings basis. Interestingly, D stock actually trades at a large discount to its five-year average trailing PE.
Utility Stocks to Buy: Southern Co (SO)
SO Dividend Yield: 4.32%
The first thing that jumps out at you with Southern Co (NYSE:SO) stock is the yield on the dividend. Indeed, it’s one of the highest in the sector. It’s also reassuring that SO has raised the dividend for 14 straight years.
SO stock trades at premiums to its own long-term earnings multiples, but it remains one of the more attractively valued names sector-wide. Heck, at 17.4, SO is one of the cheaper utility stocks in the S&P 500.
Then there’s the fact that business is brisk. SO provides electricity to some of the hottest areas of the country.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
