Bond yields have certainly become more attractive for investors of late, but those higher yields have declined significantly recently.
The benchmark 10-year Treasury rate is currently paying 4.2%, down from as high as almost 5% last year. A 20-year municipal bond pays maybe 3.5%, if you’re lucky.
But there’s a better place to get income. Dividend stocks can not only provide a much better income but a good potential for appreciation over time. And with utility stocks lagging, there’s even more room for outperformance going forward.
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Of course, the stock market has more risk and volatility than bonds. Stocks are not the same animal. But you can find certain stocks that come closer. The most bond-like sector of the market is utility stocks. And today, I’m going to tell you about some of the best utility stocks, at least in my mind.
Utility companies supply the essential services of electricity, gas, and water. These are vital services that people literally can’t live without and will continue to buy in any economy or any market. It’s not like electricity and water were all the rage a couple of years ago but now people aren’t into those things anymore.
These companies typically operate legal monopolies in their area and don’t have to worry about losing customers. The reliable income generated is usually passed on to the shareholders in the form of high dividends. Utilities are one of the highest income-paying sectors of the market while they also have far less volatility than the overall market.
The Utilities Select Sector SPDR Fund (XLU), a sector benchmark ETF that tracks an index of 28 utility stocks, currently yields 3.5%. That’s a better yield than you can get on many bonds these days, but there’s more to the story. XLU provided a total return of 107% over the last 10 years and 27% over the last five (with dividends reinvested).
Compared to an investment in bonds, you would have gotten a better income and grown your principal at the same time on an investment that has been only about one-third as volatile as the overall stock market. In addition to XLU, there are several other individual utility stocks that are great candidates to provide a solid income and capital appreciation over time.
Here are two more.
Best Utility Stocks: NextEra Energy, Inc. (NEE)
Yield 3.28%
NextEra Energy provides all the advantages of a typical utility plus exposure to the fast-growing and highly sought-after alternative energy market.
NextEra Energy is the world’s largest utility. It’s a monster with about $21 billion in annual revenue and a $117 billion market capitalization.
Ordinarily, when you think of a huge utility you probably think it has lackluster growth and a stable dividend. But that’s not true in this case. Earnings growth and stock returns have well exceeded what is normally expected of a utility.
For the last 10-, five-, and three-year periods; NEE has not only vastly outperformed the Utility Index, it has also significantly outperformed the S&P 500 over the last 10 years (210% with dividends reinvested).
How can that be? It’s because it isn’t a regular utility. NEE is two companies in one. It has one of the best regulated utilities in the country, which accounts for about 55% of earnings and provides steady cash flow, and also a world-renowned alternative energy company, which accounts for about 45% of earnings and provides a higher level of growth.
Florida Power and Light is the largest regulated utility in the U.S. It has over 5 million customers in Florida. It is one of the very best electrical utilities in the country. The state has a growing population as well as historically friendly regulators. That’s huge for getting approvals for periodic expansions and price hikes. It also doesn’t hurt that Floridians run their air conditioners like crazy, and just about all year long.
The alternative energy company, NextEra Energy Resources, is the world’s largest generator of renewable energy from wind and solar. Alternative energy is the future and this company is at the top of the heap. The government and regulators love them for it. It’s also a huge benefit that the cost of clean energy generation constantly gets cheaper as technology advances.
There is also a huge runway for growth projects. This part of the company grew earnings 13.8% during the pandemic in 2020 and continues to benefit from planned capital investments.
Best Utility Stocks: Xcel Energy (XEL)
Yield 3.52%
Xcel is a regulated electric and natural gas utility serving 3.7 million electric customers and 2.1 million natural gas customers in eight states, primarily in the northern and southwestern U.S. It is also one of the largest renewable energy providers in the U.S. with about a third of electricity sales generated from alternative energy.
Alternative energy is what separates XEL from the utility pack and makes it a much better investment. It enables investors to play defense and offense at the same time. You get stable earnings and low volatility along with exposure to one of the most exciting and fast-growing areas of the market.
Results support that bold statement. Since 2005, earnings grew at a compound annual rate of 6.1%. While that might not sound exciting, it was good enough to deliver average annual total returns of better than 10% over the last 10 years (with dividends reinvested).
While the longer-term trajectory looks excellent, it’s really the recent market action that prompts the recommendation. Inflation is sticking around, and the Fed seems poised to keep rates high, the same scenario that enabled XEL to strongly outperform the market last year. It’s a good stock to buy almost anytime. But the stock is trading at the low end of its recent range and is cheap ahead of a period of likely relative outperformance.
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*This post is periodically updated to reflect market conditions.
