I’m no Chicken Little. But, at this point in time, I can’t blame anyone for saying it feels like the sky is falling.
There’s the coronavirus outbreak in China, which keeps getting worse by the day and has already infected more than twice as many people as the SARS outbreak of 2002/03 (and that outbreak hit the global economy pretty hard). U.S. Presidential Donald Trump is going through an impeachment trial — a rarity in U.S. political history. Not too long ago, the U.S. launched a strike that killed one of Iran’s top generals, and now, Middle East tensions are escalating.
Meanwhile, Britain has officially left the European Union. Interest rates, which are historically a somewhat good gauge of investor confidence in the economy, are at or near record lows everywhere. The interest rate yield curve in the U.S., which tends to predict recessions, just inverted, again.
Does all of this mean that the global economy is headed for a recession and that the stock market is due for a correction? No. On the contrary, I actually think economic conditions will improve in 2020, thanks to easing monetary policy across the globe and easing U.S.-China trade tensions. I also think stocks will do just fine.
But, it does mean that there’s a lot of noise, volatility and instability in global markets, and that traditionally stable fixed income markets won’t offer investors a lot of yield. Against that backdrop, stable and high-yield utility stocks become quite attractive.
With that in mind, let’s take a look at five utility stocks to buy for stability in an unstable market.
Utility Stocks to Buy for Stability: American Electric Power (AEP)
One of my favorite utility stocks over the past few years has been American Electric Power (NYSE:AEP). The electricity services provider, which services 5.4 million customers across 11 states, has successfully leveraged customer expansion and stable demand drivers to spark sustained strong revenue and profit growth.
Big share price gains have followed suit. Over the past three years, AEP stock is up more than 60%. That’s a huge gain for a utility stock.
This will all continue for the foreseeable future. The U.S. economy is on solid footing. U.S. consumers are on especially solid footing. So long as that remains true, they will continue to pay up for electricity services, which will help American Electric Power sustain healthy profit growth. At the same time, investors will increasingly seek to play defense as market instability rises, and when they do, most of them will likely turn to AEP stock, given its long history of sustained profit and share price gains.
Meanwhile, the stock has a 2.7% dividend yield. That big yield looks quite attractive next to the 10-Year Treasury yield of 1.5%. Given broader market instability, it’s unlikely the 10-Year Treasury yield rises much anytime soon. So, as investors look for yield elsewhere, they will likely run into AEP stock and its stable 2.7% yield.
Sempra Energy (SRE)
Another one of my favorite utility stocks to buy when the market starts showing signs of instability is Sempra Energy (NYSE:SRE).
Sempra is a multi-faceted energy company that provides energy services to more than 40 million customers globally across Southern California, Texas, Chile and Peru. Inherently, this positions the company for stable operating results, because of its huge size and focus on delivering must-have resources. But, Sempra is selling its Peru and Chile businesses, and expanding its Mexico business.
In so doing, Sempra is becoming more stable with better growth prospects than ever, because: 1) Peru and Chile are volatile economies relative to California and Texas and 2) Mexico is one of the more rapidly growing economies in the world with a growing need for energy infrastructure.
Investors like this transition. In 2019, SRE stock was up 39%. This transition will continue in 2020. I don’t see any reason why investors will stop liking it. The numbers will remain good. The dividend will remain big around 2.4%. And, above all else, the stock should keep powering higher.
Duke Energy (DUK)
One utility stock that should also provide attractive stability to weather broader market volatility 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. They provide electricity, gas and commercial renewable services across multiple states. Demand for these services is largely unwavering. So long as the U.S. economy remains on solid footing — which it should for 2020 — then Duke’s revenues and profits will move higher.
At the same time, so long as interest rates remain low — and they should for 2020 — then Duke will have low interest expenses to service its debt, and a relatively high dividend yield, which will appear increasingly attractive to income-seeking investors.
All in all, so long as rates remain low and the U.S. economy remains on solid footing, DUK stock should keep powering higher.
American Water Works Company (AWK)
Up 45% over the past year and 140% over the past five years, water service provider American Water Works Company (NYSE:AWK) has been one of the best performing utility stocks in the both the near and long term.
That’s because this company has strong and stable fundamentals, with strong and stable growth drivers.
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. Because consumers will forever need water, regardless of broader economic conditions, this positioning as the largest water company makes American Water one of the more stable utility stocks in the market.
But, that’s not why AWK stock is up so much over the past few years. Instead, it’s up so much because there is a huge opportunity for American Waters to sustain 7% to 10% annual profit growth through upgraded plumbing. That is, most water pipes in the U.S. are old, inefficient and need to be upgraded, and American Water is rapidly upgrading this water infrastructure.
As they continue to do so over the next few years, American Water’s revenues, profits and stock price will all move higher.
NextEra Energy (NEE)
Much like American Water Works, leading renewable energy and battery storage company NextEra Energy (NYSE:NEE) has been a huge out-performer in the utility stocks category over the past few years, with NEE stock up 50% over the past year and 145% over the past five years.
The growth story at NextEra Energy is pretty simple. Technological advancements are pushing renewable energy costs down by a ton, with energy storage costs having dropped by nearly half in just five years. As renewable energy costs have come down — and as social pressures to “go green” have risen — demand for renewable energy has skyrocketed. This has led to a big boost in NextEra’s revenues and profits, because the company is a leader in deploying renewable energy.
Going forward, as demand keeps rising, more resources will be invested into driving renewable energy costs down even further. As costs keep coming down, demand will keep rising, leading to more resources being invested into driving costs lower. Lather, rinse, repeat. This virtuous growth cycle will power sustained big growth in NextEra’s revenues and profits for the foreseeable future.
As it does, NEE stock will keep rising, too.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.