3 Top Utility Dividend Stocks to Buy Now

Solar panels with wind mills in the background.

Utility stocks are a powerful way to boost your dividend income. Thanks to the defensive nature of their business and highly regulated revenue, utilities can generate stable cash flow and offer steady dividends. In fact, most utility stocks have not just paid dividends but have increased those dividends regularly for decades, which is why investors can bank on the sector for a steady flow of income and above-average yields.

Critics feared that rising interest rates could pressurize utility stocks, but the sector proved otherwise. Utilities across the board -- electricity, gas, and water -- continue to deliver strong operational numbers and maintain dividends, further strengthening the investing thesis for utility stocks. Some of the top utility stocks have logged double-digit returns year to date, giving investors a strong reason to remain bullish on the sector.

Data source: Finviz. Data as of Dec. 8, 2017. Chart by author.

Some of you might be skeptical of investing in utility stocks at current values. Frankly, for dividend investors, I believe there's never really a bad time to own utilities, as long as you're investing for the long haul and the stocks you pick offer visibility into the future. Stocks like Duke Energy, NextEra Energy, and AES Corp are fantastic examples and make great bets in the utility sector today. Here's why.

The world's largest utility stock also pays delectable dividends

NextEra Energy is the world's largest utility stock today, with a market capitalization exceeding $70 billion. But that isn't why I'm recommending the stock -- it's more about NextEra's incredible hold in the renewable energy space that should appeal to dividend-seeking investors.

NextEra stock's dividend yield of 2.5% may not be among the highest in industry, but it's one of the best dividend growth utility stocks you can find today. NextEra has grown its dividends at a compounded average clip of 8.5% since 2005, in line with its adjusted earnings per share. I expect the trend to continue, which means NextEra's dividends could grow 6%-8% through 2020, going by management's target adjusted EPS growth, driven by renewable energy.

Renewable energy is unquestionably the biggest challenge facing the utility sector today. NextEra remains unperturbed, as it has already made its mark in the clean-energy space. Investors in utility stocks may not know this, but NextEra is the world's largest producer of wind and solar energy and is among the world's largest nuclear power operators. It had roughly 45,900 megawatts of total generating capacity as of the end of 2016. Between 2017 and 2020, NextEra intends to pump a whopping $40 billion to $44 billion into growth projects, most of which revolve around renewable energy .

Given the backdrop, I see exponential growth potential in NextEra's earnings and dividends. With management committed to boosting dividend per share by 12%-14% off 2015 base through "at least 2018," dividend investors can look forward to good news when NextEra reveals its post-2018 dividend policy early next year.

Lock in 4%-6% dividend growth with this top utility stock

Duke Energy is one of the largest utilities in the U.S., with an electricity and gas customer base of 7.4 million and 1.5 million, respectively, and electricity-generating capacity of roughly 52,700 megawatts. By comparison, closest competitor Dominion Energy has a capacity of 25,700 MW of electricity generation.

Guess how many years since Duke started paying a dividend? Hold your breath: The utility has paid a dividend every quarter for 91 straight years. If that's impressive, consider that management is planning to pay out 70%-75% of earnings in dividends and grow its dividends annually by 4%-6% through 2021. That means utility investors can earn high-single-digit or even double-digit returns from Duke if the stock continues to yield 4% or more. Going by Duke's growth plans, I'm optimistic it will.

Duke is not only persistent about modernizing its energy grid and gas infrastructure, but has also spent more than $5 billion on renewable energy -- mainly wind and solar -- in the past decade. The utility's biggest clean-energy leap came last year , when it acquired Piedmont Natural Gas for $4.9 billion to triple its natural gas customer count to 1.5 million.

Duke's focus on renewables is unmistakable. Between 2017 and 2021, the company expects adjusted EPS from commercial renewables to grow 8%-12%, compared to projected growth of 4%-5% for its traditional electric utilities and infrastructure business. If the alternative energy markets grow at a faster-than-estimated pace, Duke could top its own earnings and dividend growth goals. Duke's dividend yield of 4% is already among the best in the utility sector.

The most underrated utility dividend growth stock

AES Corp is the youngest utility dividend stock on this list, given that it started paying an annual dividend only in 2013. The growth in AES' dividend since, however, has left dividend-minded investors awestruck: The utility stock has tripled its annual dividend since 2013 and currently yields a hefty 4.5%.

AES' plans are equally impressive : It aims to grow its earnings, free cash flow, and dividend per share by 8%-10% through 2020. That sounds like an incredible deal for income investors when you factor in the stock's high dividend yield. AES' confidence in its financial goals stems from a story you're already familiar with: renewable energy.

AES recently acquired the largest independent solar developer in the U.S., sPower, adding 1,274 MW of operating solar and wind capacity and nearly 10,000 MW of capacity under development in the U.S. Thanks to moves like these, the share of coal in AES' capacity generation is projected to slip to 33% by 2020 from 41% in 2015, even as the share of gas and renewables is estimated to improve 3 percentage points to 35% and 5 percentage points to 28%, respectively.

And it's not just renewables that should boost AES' cash flow and dividends. The utility is aggressively selling its coal assets, among others, as it strives to shed some weight off its seven-subsidiary heavy portfolio and clean up its balance sheet. AES could pocket $2 billion from these moves, a good portion of which should go to shareholders in the form of dividends.

For utility investors, AES could turn out to be the underdog of their dividend portfolio in the long run.

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Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends National Grid. The Motley Fool recommends Dominion Resources. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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