2024 has been something of a banner year for the market, setting multiple all-time highs despite brief corrections in April and July/early August (and a tricky period now that September is here).
And while artificial intelligence (AI) has garnered all the hype and headlines, under the radar, utility stocks have been the best-performing sector so far this year.
As of this writing, the S&P 500 is up 14.9% in 2024, but the utility sector is up 21.1% in the same period.
Part of that outperformance is due to significant federal spending on energy infrastructure, with the Bipartisan Infrastructure Law (2021) directing $1.2 trillion towards energy, transportation and climate initiatives.
Another element, of course, is the Fed’s changing posture on interest rates, with cuts expected to begin in just the next few weeks.
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Utilities, which historically offer dividend yields of around 2.5%, are simply less competitive for income-seeking investors when cash deposits are yielding upwards of 5%. (The sector is currently yielding right around 3%, a comparatively high yield for the group.)
Also contributing to that outperformance is significant underperformance over a longer time period. In the last five years, the S&P 500 has returned an astronomical 83.7% while utilities have returned only 22.7%.
With rates likely to fall in the coming months, utility stocks still have room to close some of that performance gap, even though it’s become a more popular trade of late (something my colleague Chris Preston and I discussed last week on our podcast).
Were utility stocks to simply revert to the mean on the yield side of the equation (rising in price until the 3% average yield dipped to the 2.5% historical average), that would translate to 20% upside in the sector.
Now, it’s not quite that cut and dry, as that would presume that the Fed will slash rates to significantly lower levels. Should the Fed moderately cut rates, say, into the 4% range in the next year or so, utilities are still at a yield disadvantage to cash and would be unlikely to enjoy the full hypothetical upside.
Even so, it’s not a question of whether rate cuts are good for utility stocks, it’s more a question of how good.
So, with that backdrop in mind, let’s take a look at the three best-performing utility stocks so far in 2024.
As a final note, because we’ve been comparing the performance of the S&P 500 to utility stocks up to this point, we’ve screened for S&P 500 constituent companies in our analysis.
The 3 Best-Performing Utility Stocks This Year
Vistra Energy Corp. (VST)
YTD Performance: 94.9%
Dividend Yield: 1.15%
Vistra Energy Corp., a retail electricity and power generation company based in Texas, operates natural gas, nuclear, coal, solar and battery energy storage facilities that serve 5 million customers in the U.S., generating 41,000 megawatts of power and with battery storage for up to 1,040 megawatts.
The company operates a number of regional power firms and, earlier this year, completed the acquisition of Energy Harbor, a nuclear energy company serving 1 million customers.
As for the stock, it’s hands-down the best performer on this list, nearly doubling the performance of the other two entries, and is benefitting significantly from the resurgent interest in nuclear power.
GE Vernova (GEV)
YTD Performance: 52.7%
Dividend Yield: N/A
GE Vernova is a product of the recent split-up of General Electric, which was finalized in April of this year. The company operates in three segments (Power, Wind and Electrification) while also emphasizing research on potential “breakthrough” technologies in energy storage, hydrogen, carbon capture, small modular nuclear reactors, advanced wind turbines, and electrification software.
Power is the largest segment by revenue, but the firm has generated more headlines from its Wind segment, which is not yet profitable. The firm also does not pay a dividend, although that could change in the future.
Constellation Energy (CEG)
YTD Performance: 51.8%
Dividend Yield: 0.79%
Constellation Energy is a U.S. energy producer that operates through five segments: Mid-Atlantic, Midwest, New York, ERCOT, and Other Power Regions. The firm generates about 33,000 megawatts of electricity across all segments and is the largest producer of carbon-free energy in the U.S.
Much of the recent appeal for Constellation has been due to its presence in carbon-free energy (90% of energy output), nuclear, and its growing emphasis on co-locating power generation with data centers (making it a direct beneficiary of the market’s AI theme).
All three of these utility stocks have significantly outperformed their sector so far this year, and all three are also making hay while the federal energy money flows.
If you’re a “traditional” utility investor who is more interested in the dividend than the growth prospects, you may want to look elsewhere, but if your focus lies in the transition to green energy, the growth of nuclear, and taking advantage of a firehose of federal spending, all three of these names hold promise.
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