[Editor’s note: This story was originally published in September 2018. It has since been updated and republished to reflect the move in utilities. While the author’s position may have changed, the utility stocks remain relevant.]
Utility stocks were supposed to be yesterday’s favorite investment. The theory regarding utility stocks was simple: Robust economic growth coupled with a full labor market was supposed to spark rising inflation. The Fed was supposed to fight rising inflation with rate hikes. Fixed income yields were supposed to rise. Utility stocks, which were long viewed as bond substitutes in an era of ultra-low interest rates, were supposed to fall.
But, that theory hasn’t fully materialized into reality.
The result? Utility stocks haven’t lost their shine. With inflation relatively contained and investors ducking into safety, stocks in utilities are still attractive assets to own for yield hunters. That is why after a big drop to start 2018 amid a soaring 10-Year yield, the Utilities Select Sector SPDR ETF (NYSEARCA:XLU) finished 2018 up 0.5% compared to the S&P 500’s 6.2% loss.
If the markets rise in 2019, can utility stocks continue their run of luck? Probably. Inflation isn’t soaring higher because technology giants are suppressing inflationary pressures (just think about the downward pressure Amazon (NASDAQ:AMZN) is putting on all consumer goods prices). This trend won’t reverse any time soon, and thus, inflationary pressures should remain subdued for the foreseeable future. With those forces subdued, utility stocks have room to rally.
With that said, what are the best utility stocks to buy for your portfolio? Here’s a list of five stocks that I think are worth a look:
American Electric Power (AEP)
Considered one of the industry’s heavyweights, American Electric Power (NYSE:AEP) is a massive electric utility company that delivers electricity to more than 5 million customers across eleven states.
The business right now is doing pretty well. Hotter than normal weather so far in 2018 has buoyed operations for the past several months, and robust economic strength in the company’s core markets has also boosted the business. Overall, sales and earnings are both trending higher at a healthy rate.
Meanwhile, the dividend yield on AEP stock is 3.7%. That seems like a good place to buy in. Normally, AEP stock maxes out when the dividend yield drops below 3.2%. Thus, at 3.7% there seems to be more room to run for AEP stock.
Sempra Energy (SRE)
Another one of the industry’s heavyweights is Sempra Energy (NYSE:SRE), the multi-faceted energy company that provides energy services to more than 40 million customers globally across Southern California, Texas, Chile and Peru.
Sempra’s business is doing well right now. Both revenues and earnings are trending higher amid a favorable economic backdrop. Plus, the company is continuing its energy diversification efforts by expanding its liquid natural gas (LNG) business, something which the company feels can help fuel sustainable long-term growth.
The dividend yield on SRE stock sits right around 3.3%. That isn’t great, but that is higher than where the yield has been over the past several years (largely below 3%). Moreover, there is a pair of activist investor firms who are involved with SRE, and they recently pounded on the table that this stock could be worth as much as $158-per-share.
Duke Energy (DUK)
Next up is electric power and gas utility giant Duke Energy (NYSE:DUK). Much like the other names on this list, Duke’s operations are stable and healthy at the current moment.
Mostly thanks to unusually hot weather and strengthening economic conditions, Duke’s revenues and earnings are trending consistently higher at a slow and stable rate. This level of growth should persist for the next several years as economic conditions remain solid.
On the yield side of things, DUK stock has a 4.4% dividend yield, which is one of the more attractive yields in this space. Historically speaking, DUK stock peaks when that yield dips below 4%. Thus, from a historical viewpoint, DUK stock has plenty more firepower to head higher.
American Water Works Company (AWK)
Although electricity and power are very important utilities, another utility of equal importance is water, and that is where American Water Works Company (NYSE:AWK) comes into the picture.
American Water provides waters services to 15 million people across 46 states and Canada. That makes American Water the largest and most diverse publicly traded water company. Moreover, American Water is planning on spending a whole bunch of money over the next several years to modernize water distribution infrastructure, an investment that will likely lead to rate hike approvals and robust long-term earnings growth.
AWK stock has a dividend yield of 2%. That isn’t great. But, what the company lacks in dividend yield, it makes up for in earnings growth, which should be able to run around 10%-per-year for the next several years. That combination of healthy earnings growth and stable yield should make AWK stock a winning investment.
NextEra Energy (NEE)
Perhaps the utility stock with the most long-term earnings growth potential on this list is NextEra Energy (NYSE:NEE). That is because not only does NextEra operate a massive utility business like the other utility players on this list, but the company is also a leading player in renewable energy and battery storage.
Over the past decade, this company has grown earnings and dividends at an 8%-per-year clip, and that robust growth should continue so long as the company’s renewable business continues to scale.
The one thing to be worried about when it comes to NEE stock is that the dividend yield is at 2.6%, which is a five-year low. But, earnings growth is robust, and it is large enough to compensate for a historically low dividend yield.
As of this writing, Luke Lango was long AMZN and AWK.