While Wall Street celebrated the fact that we avoided a recession in 2023, that doesn’t necessarily mean fortune will favor us again this year, thus warranting a look at utility stocks to buy. Fundamentally, the biggest bullish case for utilities centers on the natural monopoly concept.
Think of all the regulations that the enterprises undergirding various utility stocks must abide by. Not just anyone can set up shop as a key resource and services provider. Beyond that point, few companies have the ability to dislodge the deeply entrenched competition. In many if not most cases, the utility giants have occupied their territories for decades. They’re not going anywhere.
In the meantime, people need their power to survive and hopefully thrive. And in this sense, utility stocks to buy warrant attention because of the underlying pricing power. Even if rates go up, households and businesses have little choice but to pay.
It’s cynical, there’s no doubt about it. But cynicism can be a very powerful tool amid uncertainty. Below are the top utility stocks to buy.
DTE Energy (DTE)
A Detroit-based diversified energy company, DTE Energy (NYSE:DTE) is involved in the development and management of energy-related businesses and services in the U.S. and Canada. Per its public profile, the company’s operating units include an electric utility serving 2.2 million customers and a natural gas utility serving 1.3 million customers in Michigan.
Fundamentally, DTE makes a solid case for utility stocks to buy because of its geographical advantage. The Wolverine State – or more commonly the Great Lakes State – attracts tons of millennials who seek shelter from cost-of-living expenses. So, the business is situated where the money is going. In addition, DTE could also attract millennial and Generation Z investment dollars for its commitment to environmental, social and governance (ESG) principles.
On the passive income front, the company carries a forward dividend yield of 3.99%. And while it doesn’t offer the greatest financial print, DTE delivers strong revenue (three-year sales expansion rate of 14.3%) and consistent profitability. Lastly, analysts rate shares a moderate buy with a $118.82 price target, projecting 16% upside.
Duke Energy (DUK)
One of my favorite ideas to bring up when discussing utility stocks to buy, Duke Energy (NYSE:DUK) is an electric power and natural gas holding company. Headquartered in Charlotte, North Carolina, Duke serves six states with diverse economies. Fundamentally, this dynamic should help mitigate risks associated with any single market. As well, this diversification expands the financial canvas, thus enabling greater stability and predictability.
As with DTE Energy, what I appreciate about Duke the most is the geographical advantage. Serving markets generally near the eastern coast of the U.S., many of these states benefit from millennial migration trends. For example, the Carolinas have consistently attracted young people. Again, with vibrant economies and lower costs of living compared to coastal metropolitan areas, Duke enjoys a demographic goldmine.
Looking at passive income, the utility giant offers a forward yield of 4.34%. That’s noticeably above the average for utility stocks, which comes in at 3.75%. Also, you gotta love the 19 years of consecutive annual dividend increases. Analysts peg shares as a moderate buy with a $104.25 price target.
American Electric Power (AEP)
Based in Columbus, Ohio, American Electric Power (NASDAQ:AEP) is a major investor-owned electric utility in the U.S. Per its public profile, American Electric delivers the namesake resource to more than five million customers in 11 states. Further, AEP ranks among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the U.S. Still, that hasn’t translated into upside, with shares down almost 17% in the trailing year.
Arguably, that could signal a discounted opportunity among utility stocks to buy for contrarians. As with the other utilities, AEP serves economically robust regions – in this case, the Midwest and Ohio Valley. Enticingly, AEP serves markets featuring major manufacturing hubs, which translates to increased electricity usage. Moreover, millennials are also moving to the Midwest, affording the utility a major migration-pattern advantage.
Generally, utility stocks represent a solid place for passive income and AEP is no different: it offers a forward yield of 4.57%. Further, the payout ratio is reasonable at 59%. Analysts rate shares a moderate buy with an $86.89 price target, implying nearly 13% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
