It’s not your grandparents’ utility sector anymore.
The advent of artificial intelligence and the transition from fossil fuels to renewable electricity generation are shaking up the generally staid power generation industry.
“With more demand for computing power for AI and more workers than ever working remote and from home, as well as the growing population, there is always an increasing need for energy,” says stock market educator Jason Brown, founder of The Brown Report and Power Trades University.
“You also have the electrification of vehicles and smart devices inside and outside the home becoming increasingly popular, and they all need one thing to run, power, which will keep these stocks moving higher in the long term,” Brown says.
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Year to date, the S&P 500 utilities sector is up 25.1% as of Dec. 6, keeping pace with the broader index as a whole. The market in general is doing pretty well, with all three major indexes, including the Nasdaq and the Dow Jones Industrial Average, hitting record highs.
That’s worth mentioning in the context of utilities. These stocks historically have been viewed as defensive — they tend to perform better than growth stocks during times of economic downturn because people need electricity, natural gas and water regardless of what the economy is doing.
But that means they also tend to underperform when the stock market is doing really well.
That’s not the case this year, as utilities are right on the S&P 500’s heels. A few other sectors are outperforming the broader index, though: communication services, information technology, financials and consumer discretionary.
So why is the defensive utilities sector spoken of in the same breath as a growth sector like tech or a cyclical sector like consumer discretionary? The short-term answer is that interest rates have been coming down.
Because utilities are generally on the safer end of the risk-reward spectrum, they are often considered proxies for bonds. As bond yields come down, that makes the dividends utilities pay more attractive. Lower interest rates also make it cheaper for utilities to borrow money to build or upgrade generation assets.
“Low interest rates make growth easier, acting like fuel on a fire for expansion,” says David Materazzi, CEO of Galileo FX, an automated trading platform.
Additionally, data centers that power artificial intelligence or cryptocurrency mining operations coupled with the increasing electrification of transportation and other industries are providing additional demand for electricity generation.
“Utilities in general are poised to do well, as there are significant tailwinds from the growing economy and expected tax cuts as well as the expected demand growth for energy from the buildup of AI usage into businesses and the economy,” says Gregory Harmon, assistant banking and finance professor at Case Western Reserve University.
Investors who want to learn more about utilities — which provide stability and dividends to a portfolio and are adding stock price appreciation to their allure — can consider these seven stocks. Dividend figures are from Dividend.com and are as of early Dec. 9:
| Utility Stock | Forward Dividend Yield |
| NextEra Energy Inc. (ticker: NEE) | 2.8% |
| Duke Energy Corp. (DUK) | 3.7% |
| Southern Co. (SO) | 3.4% |
| American Electric Power Co. Inc. (AEP) | 3.8% |
| Dominion Energy Inc. (D) | 4.8% |
| Eversource Energy (ES) | 4.8% |
| Clearway Energy Inc. (CWEN) | 5.9% |
NextEra Energy Inc. (NEE)
This utility makes both Brown’s and Materazzi’s list. It also often is included in lists of top renewable energy stocks, meaning it is a play on the megatrend of the energy transition away from fossil fuels.
This company, which says it is the largest utility company in the world, has a regulated utility segment that engages primarily in the generation, transmission, distribution and sale of electric energy in Florida. Another segment produces electricity from renewable sources, including wind and solar. The company is also involved with green hydrogen, battery storage and nuclear plants.
“Leaders like NextEra are charging into renewables, setting the pace for the entire sector,” Materazzi says.
NextEra Energy has a dividend yield of 2.8% and has increased its dividend for 30 consecutive years.
Duke Energy Corp. (DUK)
Here’s another one that makes both Materazzi’s and Brown’s lists.
Duke’s electric utilities serve more than 8 million customers in the Carolinas, Florida, Indiana, Ohio and Kentucky. It also has a natural gas unit that services 1.6 million customers in North and South Carolina, Tennessee, Ohio and Kentucky.
Duke Energy is also one of the biggest nuclear utilities in the U.S., giving it more than a toehold in an industry expected to play a big role in decarbonizing the economy.
Nuclear energy is experiencing a renaissance after being shunned for years following a reactor disaster in Japan in 2011. Now, governments are embracing nuclear because it produces energy without greenhouse gas emissions and can provide a baseload of electricity when solar and wind farms aren’t producing.
Duke Energy is yielding 3.7% and has increased its dividend for 20 consecutive years.
Southern Co. (SO)
This Georgia-based company is another utility stock that makes both Materazzi’s and Brown’s lists.
The company owns electric utilities and natural gas distribution utilities and provides wholesale energy, distributed energy solutions, fiber optics and wireless communications.
Its operations in Georgia, Alabama and Mississippi give it exposure to relatively healthy economies, population growth and amenable regulatory environments.
One way utilities make money is by building or updating generation capacity and then recouping the money along with a profit from rate payers. So utilities that are located in jurisdictions with regulators that tend to approve project requests have an advantage.
Southern Co. is yielding 3.4% and has increased its dividend for 24 consecutive years.
American Electric Power Co. Inc. (AEP)
Another stock that makes both Materazzi’s and Brown’s lists is American Electric Power.
The utility has 5.6 million customers in 11 states with a 40,000-mile transmission network the company says is the largest in the nation.
Last year, AEP generated 42% of its 29,000-megawatt capacity from coal; 27% from natural gas; 21% from hydrogen, wind, solar and pumped storage; and 8% from nuclear. By 2033, the company aims to get its coal generation down to 17%, natural gas down to 25% and renewables up to 50%.
AEP is yielding 3.8% and has increased its dividend for 15 consecutive years.
Dominion Energy Inc. (D)
This utility provides regulated electricity to 3.6 million homes and businesses in Virginia and the Carolinas, in addition to regulated natural gas service to 500,000 customers in South Carolina.
Dominion is also a big nuclear player and has been developing regulated solar power and offshore wind farms, claiming it is the biggest producer of carbon-free electricity in New England.
Materazzi includes this utility in his list of top utility stocks for dividends along with NextEra, Duke and Southern.
“Think of these companies as the roots of a tree: deep, strong and built to weather storms,” he says. “They pay dependable dividends and have business models designed for steady and long-term success.”
Dominion is yielding 4.8%.
Eversource Energy (ES)
This utility provides electric, natural gas and water service in Massachusetts, Connecticut and New Hampshire. Eversource has 4.4 million customers and says it is the biggest energy delivery company in New England.
Brown lists Eversource along with NextEra, Duke, Southern Co. and AEP. He notes that utilities yielding 3% to 4% are enough to keep up with inflation, and those that have been in an uptrend for many years allow investors to collect a dividend while their initial investment is increasing as well.
Eversource is yielding 4.8% and has increased its dividend for 26 consecutive years.
Clearway Energy Inc. (CWEN)
This utility prides itself on being one of the biggest owners of clean energy generation assets in the U.S. Its portfolio contains about 11.7 gigawatts of capacity in 26 states, including 9 gigawatts of wind, solar and energy storage assets.
Harmon lists the company as a top utility for dividends along with UGI Corp. (UGI), Avista Corp. (AVA) and Spire Inc. (SR).
“These four all have stock price charts with positive momentum and are poised to break resistance levels to the upside or already have,” Harmon says.
Clearway pays a plump 5.9% forward dividend yield, and it’s been raising that payout for five consecutive years.
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7 Best Utility Stocks to Buy for Dividends originally appeared on usnews.com
Update 12/09/24: This story was previously published at an earlier date and has been updated with new information.
