Utilities can help stabilize a portfolio.
Adding utility stocks in a portfolio can lower volatility and risk since most utility companies operate in a regulated environment. Investors often view these stocks as a safer investment since the number of competitors is lower and they provide dividends, generating additional income for income investors and retirees. “Utility stocks are of more interest to income investors because it is a regulated industry with stable prices,” says Stuart Michelson, a finance professor at Stetson University. “Utilities don’t appeal as much to growth investors.” These stocks have another advantage — their dividends tend to produce higher yields than other fixed-income investments and are generally less volatile than other equities, he says. Here are six utility stocks to add to your portfolio.
American Water Works (ticker: AWK)
American Water Works is a Camden, New Jersey-based public utility company that provides drinking water and wastewater services to 15 million people in 46 states. The company generates a 1.43% dividend yield and has consistently increased its dividend payments over the past few years. American Water Works is the largest publicly traded water and wastewater utility in the U.S. “With stable revenue streams and low demand elasticity, utilities tend to pay more consistent higher dividends,” Michelson says.
Brookfield Infrastructure Partners (BIP)
Brookfield Infrastructure Partners owns a diversified portfolio of infrastructure businesses such as regulated utilities, transport, energy and data in North and South America, Asia-Pacific and Europe. The company focuses on owning assets that generate stable cash flows and require minimal maintenance capital expenditures. Brookfield generates a 3.93% dividend yield and has a history of increasing dividends. In the U.S., which is likely to experience a material acceleration in this field under the Biden administration, “we continue to prefer the names which can combine a structurally solid and growing traditional utility business with a clear ambition — often aided by state-level legislation — to focus on accelerating renewables growth,” says Jean-Hugues de Lamaze, managing director and senior portfolio manager at TortoiseEcofin. Brookfield, NextEra Energy (NEE) and Dominion Energy (D) are among the firm’s “favorite names in this category,” he says.
NextEra Energy (NEE)
NextEra Energy is a Juno Beach, Florida-based company that serves 11 million residents across two Floridian subsidiaries, including Florida Power & Light Company and NextEra Energy Resources that generates renewable energy from wind, sun and battery storage. The company has a 1.81% dividend yield and has also increased dividends the past few years. In both the U.S. and Europe, the trend is to decarbonize energy systems by leveraging the “opportunity of increasingly affordable renewable electricity to sustain double-digit long-term total returns for the best positioned utilities,” de Lamaze says. “Valuation remains attractive relative to the market in both regions, despite the rapidly improving growth backdrop.”
AES Corp. (AES)
AES is an Arlington, Virginia-based power company that provides sustainable energy to 14 countries through its distribution businesses along with its thermal and renewable generation facilities. The company generated $10 billion in revenue in 2019 and owns and manages $34 billion in total assets. AES generates a 2.56% dividend yield and has a solid history of raising its dividends over the years. “Utilities tend to be good defensive stocks, earnings are rarely surprising and they usually maintain performance in volatile markets,” Michelson says.
Edison International (EIX)
California-based power producer Edison raised its dividends in December, its 17th consecutive annual increase. The company, which generates electricity through hydroelectric, diesel, natural gas, nuclear and photovoltaic sources, currently has a 4.22% dividend yield. “Utilities tend to be resistant to economic cycles because demand for utilities does not vary much compared with other industries,” Michelson says. Companies such as Edison and Exelon Corp. (EXC) combine “deep value with a second-derivative exposure to the decarbonisation/electrification trend, where such value could be unlocked through near-term catalysts,” de Lamaze says.
NRG Energy (NRG)
NRG Energy, a Princeton, New Jersey-based utility company, generates electricity using natural gas, coal, oil, solar and nuclear power facilities. The company completed its acquisition of Direct Energy from Centrica PLC in early January. The deal adds more than 3 million Direct Energy customers. NRG now serves customers in all 50 states and parts of Canada with a total of 3.7 million residential, small business and commercial and industrial customers. NRG has a 3.2% dividend yield. “Utilities are more in demand in today’s low-yield climate, and with increased demand, their prices have risen compared to other economic times,” Michelson says.
Six of the best utility stocks to buy:
— American Water Works (AWK)
— Brookfield Infrastructure Partners (BIP)
— NextEra Energy (NEE)
— AES Corp. (AES)
— Edison International (EIX)
— NRG Energy (NRG)
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