Utility stocks are among the most defensive of defensive stocks. One reason for this is that utility companies are highly regulated, so they have limited pricing power. That means that they are not poised for big gains, and despite (perhaps even because of) the pandemic, many investors have been looking for growth stocks.
However, with market volatility expected to be the new normal until at least after the election, is it time for investors to reconsider utility stocks? More analysts are becoming concerned that another market crash may be imminent.
Speaking with InvestorPlace via email, Laura Gonzalez, Ph.D., associate Professor of Finance at California State University, Long Beach, described some of the qualities that make utilities excellent stocks to buy when the market is in a downturn:
“Utility stocks become particularly attractive during recessions because they benefit from the steady demand of essential products and services. Even though they are heavily regulated, and some operate in highly competitive markets, many offer dividends.”
So if growth is what you’re after, there are certainly better options. However, the reason utility stocks should get your attention is for the way they provide stability in volatile markets.
Here are six utility stocks that can provide reliable income and maybe a little growth as well:
- NextEra Energy (NYSE:NEE)
- Duke Energy (NYSE:DUK)
- Dominion Energy (NYSE:D)
- American Electric Power (NYSE:AEP)
- American Water Works Company (NYSE:AWK)
- Brookfield Infrastructure Partners (NYSE:BIP)
While many investors are chasing growth, the continued uncertainty in the market may make it time to look at utility stocks because of the value they provide.
NextEra Energy (NEE)
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When you look at utility stocks, the smartest plays are companies generating revenue from renewal energy as well as traditional utility services. And that’s the allure of NextEra Energy.
Based solely on market cap, NextEra is the largest electric utility in the United States. One reason for that is the company’s two distinct business units. The first unit operates as a traditional utility, Florida Power & Light. The utility services south Florida, which continues to be one of the fastest growing population centers in the country.
But what generally gets investors excited is NextEra Energy Resources, the subsidiary that builds and operates solar energy and wind farms. NextEra Energy Resources accounts for nearly 50% of the company’s overall business. And more states are beginning to mandate more of their power come from renewable sources.
NEE stock is up just under 10% in 2020 and its P/E ratio sits at 36.20. This is consistent with NextEra’s position as a sector leader. The dividend yield is currently around 2.15%, but this is an example where yield is a deceiving metric. The stock has increased its dividend every year for the past 26 years, putting it in the elite Dividend Aristocrat category.
Duke Energy (DUK)
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Duke is a tortoise among utility stocks. This company won’t dazzle investors who are looking for growth. In fact, DUK stock is down about 10% in 2020. But it pays a reliable dividend that the company has increased for 15 consecutive years.
Duke Energy is primarily a traditional utility company. That means it derives the bulk of its revenue from “traditional” electric and natural gas. But these are highly regulated industries. This means the company has a cap on the rates it can charge, and therefore, a cap on growth.
In 2017, Duke initiated a 10-year plan to invest $42 billion to improve its electrical grid and natural gas infrastructure. This may be a case of the short-term pain of adding debt to its balance sheet leading to long-term gain in the form of investments that will support earnings growth. Plus, Duke is planning to use some of this investment to support its renewable energy business.
Duke Energy’s primary markets are Central Florida and the Carolinas, both of which show strong continued residential customer growth.
Dominion Energy Inc. (D)
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Dominion Energy is making investments to become a significant player in the renewable energy market. And it just received a cool $10 billion from Warren Buffett’s Berkshire Hathaway (NYSE:BRK:A,BRK:B) to assist with that effort. The company is partnering with Smithfield Foods to repurpose methane gas emitted by pigs from its industrial farms.
You heard that right: Dominion is working to find a way to repurpose pig manure. That’s a bold proposal. And over the next decade, Dominion plans to invest $650 million into agriculture-derived gas projects. The company plans to pay for this, in part, with the $10 billion ($4 billion in cash and $6 billion in assumed debt) that Berkshire is giving Dominion for its 7,700 miles of gas pipelines.
But the company’s regulated utility businesses make it a powerhouse in its own right. Dominion is one of the biggest utilities on the East Coast, sporting a market cap just under $62 billion.
D stock is down about 10% for the year. But it has a generous and rock-solid 5.11% dividend.
American Electric Power (AEP)
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When it comes to utility stocks, bigger is typically better. And that’s one of the best reasons to buy American Electric Power. The company services five million customers across eleven states.
American Electric Power derives most of its revenue from its core business of generating power. But AEP continues to look for ways to adapt to the changing industry. For example, the company is reducing its reliance on coal.
And like many utilities, AEP is making a focused effort to increase its renewable energy base: since 2005, they have more than tripled their renewable base.
AEP stock is down almost 10% for the year, but up nearly 5% in the past month. The stock currently sports a dividend yield of 3.27%. While not as large as other utility stocks, it is on the rise. And in any event, when you compare it to the 10-year Treasury yield, investors won’t find much to complain about.
This is particularly the case when the company has increased its dividend in each of the last six years. In that time, the dividend has increased 100%.
American Water Works Company (AWK)
American Water Works Company is one of the utility stocks actually positive for the year. AWK stock is up nearly 10% and has increased more than 30% since the March selloff. And there’s good reason for the surge. American Water Works is one of the largest water utilities in the world. And water is becoming an increasingly important commodity.
American Water Works provides drinking water and wastewater services to 1,600 communities in the United States and parts of Canada, making them the largest and most diverse publicly traded water company. However, the company only operates in 16 states right now, so there is a large opportunity to expand.
One of AWK’s subsidiaries, West Virginia American, recently filed paperwork seeking approval for its infrastructure replacement plan. This will help reduce long-term customer costs and improve reliability.
Does the long-term potential for growth make up for a dividend that is currently below 2% (1.63%)? That’s for you to decide. But with its dominant footprint in this highly fragmented category, AWK stock looks like a solid investment.
Brookfield Infrastructure Partners (BIP)
Rounding out our list of utility stocks is Brookfield Infrastructure Partners. Infrastructure is always a go-to investment in volatile markets. And Brookfield is one of the best infrastructure stocks available. The company has a diverse portfolio of infrastructure businesses, including regulated utilities, transports, energy, and data infrastructure. The company’s assets range from cell towers and data centers to railroads and ports.
Plus the company has the “traditional” infrastructure items such as natural gas pipelines and electric transmission lines.
This combination of traditional utility businesses, and businesses that act like utilities, generates predictable cash flow. In fact, almost 95% of Brookfield’s cash flow is regulated or contracted. And the company is looking to grow through acquisitions, which should give earnings an additional boost.
BIP stock is down nearly 5% in 2020, but has climbed nearly 70% off the March lows. The company also pays out a reliable dividend, with a current yield of 4.64% despite a reduction back in May.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.