Income-focused investors crave stability and consistency in their long-term portfolios. Enter utility stocks for income, a sector known for its reliable cash flow and dependable dividend payouts. These companies provide essential services like electricity, gas and water, guaranteeing steady demand regardless of economic conditions.
In general, the rates utility companies charge customers are either regulated by government bodies or contractually fixed. As a result, they have reliable revenue streams that facilitate steady dividend payouts with above-average yields. Meanwhile, the utility sector is poised for sustained growth, driven by rising electricity demand, grid modernization initiatives and the transition towards renewable energy sources.
According to the U.S. Energy Information Administration, renewable energy will be the fastest-growing source of electricity generation, supplying 44% of U.S. electricity by 2050. Market analysts anticipate an increase in infrastructure investments for a cleaner and more efficient energy grid. With that in mind, here are our top utility stocks for income.
Duke Energy (DUKE)
Leading the charge for utility stocks for income is Duke Energy (NYSE:DUK), a titan serving 8.2 million customers across 6 states. Duke boasts a history of reliable cash flow underpinned by its diversified generation portfolio.
While the fourth-quarter revenue dipped slightly year-over-year (YoY), adjusted earnings per share (“EPS”) soared 36%, showcasing the company’s ability to translate customer growth and rate increases into strong earnings. Management remains committed to long-term growth of 5% to 7% through 2028, positioning the company as a leader in the utility sector’s green transformation. Duke will also likely receive various tax incentives from the U.S. Inflation Reduction Act.
With a compelling 4.24% dividend yield and a commitment to clean energy, Duke Energy offers a chance to lock in consistent income and participate in the future of reliable power generation. The company is making significant progress toward its net-zero carbon emissions goal by 2050 and is well-aligned with the industry’s clean energy transition.
Yet, year-to-date (YTD), DUK stock is flat. At present, forward price-to-earnings (P/E) and price-to-book (P/B) ratios stand at 16.2x and 1.6x, respectively. Finally, analysts’ 12-month price target of $101.00 implies a 4% upside potential, making Duke an intriguing option among utility stocks for income.
NextEra Energy (NEE)
Today’s second spot on our list of utility stocks for income goes to NextEra Energy (NYSE:NEE). The utility’s portfolio includes Florida Power & Light Company, the largest electric utility in the U.S., and NextEra Energy Resources, a leading generator of renewable energy from wind and solar.
NextEra’s regulated utility business in Florida provides a stable foundation, generating predictable income backed by long-term contracts. Meanwhile, its rapidly expanding renewables segment positions the company to capitalize on the industry’s growth opportunities. With renewable energy projected to overtake coal as the primary source of electricity by 2025, NextEra’s clean energy focus aligns perfectly with these powerful tailwinds.
In the fourth quarter of 2023, NextEra reported a 12% YoY increase in revenue to $6.88 billion. However, net income declined 21% YoY to $1.21 billion, or 59 cents per share, with the utility business contributing approximately 70% of the company’s profits. Its unregulated business continues to thrive, driven by robust demand for solar and wind power, and boasts an impressive pipeline of projects.
Recently, NextEra also unveiled its Real Zero strategy, aiming to eliminate carbon emissions from its operations by 2045. The company remains on track to develop 32.7 to 41.8 GW of renewable and battery storage projects by 2026.
So far in 2024, NextEra shares have delivered a 5.5% return, while the dividend yield stands at 3.23%. Currently, NEE stock trades at a valuation of 18.8 times forward earnings and 2.7 times book value. Analysts have set a 12-month price target of $71 on the stock, suggesting an attractive 11% upside potential from current levels.
Utilities Select Sector SPDR Fund (XLU)
We conclude our discussion on utility stocks for income with an ETF, namely the Utilities Select Sector SPDR Fund (NYSEARCA:XLU). It provides diverse exposure to companies in the utilities sector as well as independent power producers and energy trader industries. XLU has been trading since its inception in December 1998. The fund offers an attractive dividend yield of 3.47% and charges a low expense ratio of 0.09% per year, making it an appealing option for income-focused investors seeking defensive exposure to the utility sector.
Currently, the fund holds 30 different stocks. The electric utilities segment dominates the portfolio with a 67% weighting, followed by multi-utilities at 28%, water utilities at 2.5%, gas utilities at 2% and independent power and renewable electricity producers at 1%.
XLU’s top 10 holdings account for approximately 60% of the fund’s total assets under management, which currently stand at around $12.2 billion. In addition to NextEra Energy and Duke Energy, the fund also holds utility heavyweights such as Southern Company (NYSE:SO), Constellation Energy (NASDAQ:CEG) and Sempra (NYSE:SRE).
Since the start of 2024, XLU has posted a gain of 4%. The fund’s valuation metrics appear reasonable, with a P/E ratio of 16 and a P/B ratio of 1.97. For long-term investors, buying the dips could prove to be a prudent strategy, especially if XLU pulls back toward the $62 level.
On the date of publication, Tezcan Gecgil did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
