Utility stocks could become more popular soon. Amid the trading volatility of recent days, many of the stock market’s usual best performers made a hard turn downward. Such moves cause many investors to rethink their investing strategies. Instead of going for the stocks they believe will go up the furthest, they turn to more stable equities.
Utility stocks have become a common choice in such an instance. While they may see less stock price growth, they also tend to produce both profits and steady amounts of cash flow. Moreover, whether the economy booms or busts, people tend to keep paying their utility bills. This reinforces the stability of utility stocks.
Investors should also note that the Utilities Select Sector SPDR ETF (NYSEARCA:XLU), which tracks the utility sector, has risen by almost 3% so far in October. Not only have these stocks to buy not seen the effects of the October swoon, but they have also grown in value as other stocks retreated. Additionally, with their steady stream of cash flow, these companies will likely provide a stable source of dividend income.
Investors should find especially promising returns in the following companies:
Consolidated Edison, Inc. (ED)
Consolidated Edison (NYSE:ED) provides steam, natural gas, and electricity to the southeastern part of New York State — including all of New York City — as well as parts of New Jersey. It owns two utilities in these regions, and they provide roughly 90% of the company’s revenue. Gas and electric transmission, as well as renewable energy, make up the remainder of company revenues.
Among utility stocks, Edison also stands out as the only utility that currently claims dividend aristocrat status. After 43 consecutive years of dividend increases, ED stock’s annual payout of $2.68 per share amounts to a yield of just under 3.7%.
ED stock also trades at a reasonable valuation. Its forward price-to-earnings (P/E) ratio stands at around 18.25. Wall Street projects average annual growth of just under 3.1% per year for the next five years. That may not impress growth-oriented investors. However, it remains enough to maintain the annual dividend hikes.
Investors who get in now could also see a buying opportunity. Between last December and June, ED stock lost 20% of its value. It has climbed from lows seen in June, but it remains about 13% below last December’s high. With its current valuation and its high, growing dividend, few will match ED stock for stability and steady income.
Dominion Energy (D)
Dominion (NYSE:D) produces and moves both electricity and natural gas. The company benefits from about 25,000 megawatts of electricity generation capacity, 15,000 miles of natural gas pipelines and 63,000 miles of electric transmission and distribution lines. It currently provides electricity in states across the mid-Atlantic region. It also provides gas to some Western states due to its takeover of Questar several years ago.
Investors should also note that it owns and operates a natural gas export terminal in Maryland. Currently, only two such terminals exist in the U.S. This allows companies to export natural gas across oceans, something that had not been possible in previous decades.
D stock currently supports a forward P/E of about 17.8. The company also enjoys something not seen very often in utilities — double-digit profit growth. Analysts forecast 14.4% profit growth for the year. That will slow in future years, but analysts still expect average annual growth of about 6.4% per year over the next five years.
D stock also stands out compared to other utility stocks on the dividend front. Its $3.34 per share annual dividend means a yield of just under 4.6%. This payout has risen every year since 2009. Given its high dividend returns, its profit growth rate and the critical role it will play in natural gas exports, D stock should remain on one’s watch list.
Exelon Corp (EXC)
Exelon (NYSE:EXC) is a Chicago-based electric and gas company that provides services to over 10 million people across the mid-Atlantic and upper Midwest. Exelon also owns facilities in Canada and conducts some level of operations in 48 of the U.S. states.
Their nuclear power plants provide 20% of all nuclear-generated power in the U.S. This helps Exelon to produce about 5% of all of the U.S.’s electricity in general. The company also generates power through both fossil fuels and renewables.
Despite its broad reach, EXC stock has reached levels that could appeal to new investors. It trades at a forward P/E of around 14, which compares well with other utility stocks. Wall Street also predicts it will see a 19.6% rate of profit increase this year. However, this will not serve as the norm. Analysts forecast 4.3% growth per year on average over the next five years. On average, profits grew by close to that rate over the previous five years.
Annual dividends come in at $1.38 per share. This brings the stock to a dividend yield of just under 3.2%. The dividend has also risen in each of the last two years. However, this stock provides more in the way of stock price growth. EXC stock has increased 22% since February. It has also seen a general uptrend since 2013. Given its critical role in power generation and its reasonable valuation, EXC stock could serve investors well on both the growth and the income fronts.
NorthWestern Corp (NWE)
NorthWestern (NYSE:NWE) provides electric and natural gas power to Nebraska, South Dakota and Montana. Out of all utility stocks, one might wonder why I recommend a company three sparsely-populated states with large land masses. However, all three states play essential roles in the agriculture, energy, and mining sectors.
Moreover, all three of its states enjoy an unemployment rate well below the national average. Also, both South Dakota and Montana currently see above-average population growth. This increased business activity and the population growth needs more power to meet their needs, leading to more growth than other utility peers would see.
NWE stock currently trades a forward P/E of around 17.75. It also tends to appreciate over time, albeit slowly. Also, the stock has also recovered from a slump that began late last year. Since February, it has resumed its march higher and has almost returned to its 52-week high.
NWE stock has also steadily improved its record on dividends. It has seen a dividend increase every year since 2009. Its current annual dividend stands at $2.20 per share, a yield of 3.6%. Given this high dividend yield and the economic future of the states where it operates, NorthWestern should serve investors well for years to come.
Southern Company (SO)
Southern Company (NYSE:SO) provides gas and electricity to customers in the southern United States. It serves about nine million customers across its region. The company also owns 200,000 miles of electric transmission and distribution lines, as well as more than 80,000 miles of natural gas pipelines. Southern also operates three nuclear power plants and operates telecom services in select cities in its region.
Southern also involves itself in both the transmission and distribution of electricity. Here it often serves customers outside of its core region. Likewise, its pipelines distribute natural gas as far away as New Jersey and Illinois.
SO stock would best serve income-oriented investors. It trades at a forward P/E of around 14.7. However, its stock price has remained range-bound since 2012. And Wall Street expects average annual growth to come in at only 1.4% per year over the next five years. That constitutes an improvement over the one percent per year seen over the last five. Still, it likely will not move the stock.
What makes SO stock stand out over other utility stocks, however, is a dividend yield of over 5.4%. Southern has raised this dividend every year since 2002. Given this fact, it remains likely that they want the dividend aristocrat status enjoyed by Edison. If so, Southern will probably continue to hike its payout despite the high yield. For these reasons, income-oriented need to take a harder look at SO stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.