[Editor’s note: This story was published in September 2019. It has since been updated and republished.]
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 dividend yield hunters. Utilities Select Sector SPDR Fund(NYSE: XLU), a utilities ETF, has jumped 23% in 2019.
The markets’ recent volatility has contributed to the XLU’s gain, as investors flee toward any safe haven. Not to mention, a number of other catalysts are in play.
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 five million customers across eleven states.
Over the past three months, AEP stock is up 6.3% and it’s up a whopping 25% year to date.
The business right now is doing pretty well, as robust economic strength in the company’s core markets has boosted the business. Overall, sales and earnings are both trending higher at a healthy rate.
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. In 2019, SRE stock is up 36%.
Sempra’s business is doing well: 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 2.6%. That isn’t great, but it’s right around where the yield has been over the past several years.
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. That said, DUK stock is up more than 9% year-to-date with a dividend yield of 4%.
Business remains fine, mostly thanks to favorable weather and strengthening economic conditions. And Duke’s revenues and earnings have been 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.
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 1.6%. 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 2.1%, 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.