For many high-yielding utility stocks, the threat of a pending rate hike from the Federal Reserve has crimped much of their appeal. The general idea is as the Fed raises rates on “safe” assets, those riskier high-yielding sectors will see their share prices shrink as investors rush for Treasuries to get yield.
Well, investors may not want to throw away their utility stocks just yet.
First, a rate hike may not be in the cards anytime soon. The stronger dollar, decline in oil prices and overall sluggish global economy put the brakes on U.S. GDP growth — increasing at a lower-than-expected rate of 0.2% during the first quarter.
Janet Yellen and company would be hard pressed to increase rates during a period of slowing growth. The lack of an increase is a boon to higher-yielding utility stocks.
Secondly, utilities aren’t just widow-and-orphan stocks anymore. Utility stocks offer plenty of growth opportunities as well. New initiatives in alternative and renewable energy production, smart metering, spinoffs of master limited partnerships and rising activity in mergers and acquisitions have breathed life into a rather sleepy sector.
These sorts of activities induce capital gains and are just what utility stocks need to power through any rate increases in the longer term. For investors, utility stocks are still a prime way to get income and growth.
Here are three utility stocks to buy today:
Utility Stocks To Buy #1: NextEra Energy Inc (NEE)
When it comes to utilities, NextEra Energy Inc (NYSE:NEE) could be one of the best picks for investors. NextEra Energy has plenty of growth opportunities as well as a steadily increasing dividend payment.
First, NEE is a renewable energy kingpin. NextEra Energy is a utility stock that boasts one of the largest portfolios of wind, solar and co-generation plants in the entire U.S. That huge portfolio — and its juicy tax credits — have already helped power earnings in previous years.
Now, NEE is hoping to get a bit more juice out of those power plants by stuffing them into its new yieldco- NextEra Energy Partners LP (NYSE:NEP). By using a yieldco, NEE will be able to raise cheap capital from investors — capital that it will use to expand its portfolio even further — and receive some pretty hefty tax-advantaged dividends from NEP.
NextEra is in the process of buying utility Hawaiian Electric Industries, Inc. (NYSE:HE) for $4.3 billion. The key is that HE is basically the only game in town on the islands, and Hawaii has been one of the most renewable-energy-friendly states in the entire country. The Aloha State features some of most lucrative tax incentives around.
All in all, the purchase of Hawaiian Electric will help NextEra Energy expand its generation portfolio, which it will drop down into NEP. For investors, that will help power NEE’s 3.1% dividend yield and the utilities’ share price higher.
Utility Stocks To Buy #2: Sempra Energy (SRE)
For natural gas utility stock Sempra Energy (NYSE:SRE), things continue to be bullish. Like the previously mentioned NEE, SRE is great combination of stability and growth that investors should want in utility stocks.
As a traditional utility of electricity and natural gas assets, Sempra features a wide portfolio of power plants, pipeline and transmission facilities. That forms a steady base- and a strong 2.97% dividend- for SRE to grow on, and that growth is coming firm a hefty dose of natural gas exports and processing.
SRE has already begun reconfiguring its Cameron liquefied natural gas (LNG) plant in Louisiana to begin the export process. That plant is one of the few in the country to have all the necessary permits to begin exporting LNG across the world.
Sempra has also submitted permits for its Port Arthur LNG facility in Texas as well as signed a deal for LNG facilities in Mexico. As one of the first to get a jump on LNG exports in the U.S., SRE should be able to get the lion’s share of business throughout the future.
For investors, that should help the earnings at SRE keep on growing. The last bump in profits was 77% increase.
Utility Stocks To Buy #3: Aqua America Inc (WTR)
Highly regulated, water utilities aren’t necessarily “momentum machines.” However, big time utility stock Aqua America Inc (NYSE:WTR) seems to be the exception. WTR has plenty of growth potential.
WTR continues to expand in its core operating realm of owning water treatment infrastructure. As smaller municipalities and towns are feeling pinched from lower tax receipts, they continue to sell off their wholly owned water plants to firms like WTR to raise cash.
Aqua America has continued to expand its footprint using such transactions. WTR has made over 200 of these types of transactions. Aqua America has also contributed to earnings as well, as many are instantly accreditive.
The real growth for WTR is coming from the energy sector.
Back in 2012, Aqua America has partnered with several shale drillers in the Marcellus for water needed for fracking and constructed a 12-inch pipeline that flows into the field. WTR has since expanded on the pipeline system and has added several bulk-water storage facilities for use in fracking.
While there has been a drilling slowdown, the Marcellus remains one of the cheapest places to drill and activity in the field is still profitable with oil/natural gas as low as it is.
That unregulated energy water initiative should help drive the utility stock’s earnings and dividends higher over the longer term. Already, WTR pays 2.5%, but Aqua American has increased its payout every year since 1997.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.