Investing in Utility Stocks is a great way to build long term wealth. Utility Stocks pay some of the highest dividend yields in the S&P 500. Since they are heavily regulated, they can operate as legal monopolies diversified across the United States, Canada, Mexico and abroad.
It is also very hard for new participants to set up a utility and compete with existing ones due to the high capital investment required. As an example, the largest utility in the world, NextEra Energy is committed to make a $50 to $55 billion capital investment in America through to 2022.
In this article, we review top 5 utility stocks that have outperformed the S&P 500 and pay handsome dividends. A spreadsheet download link is also provided that lists all 28 utility stocks in the S&P 500, with relevant data such as:
- Market Capitalization
- Dividend Yield
- Forward Price to Earnings Ratio
- Payout Ratio
- Year to date Performance
Table of Contents
- How to Use Excel Spreadsheet of Utilities Dividend Stocks
- List of All Utility Dividend Stocks
- NextEra Energy (NEE)
- American Electric Power (AEP)
- American Water Works Company (AWK)
- Xcel Energy (XEL)
- WEC Energy Group (WEC)
Performance of Utility Sector Versus the S&P 500
The S&P 500 Utilities Sector currently yields a 2.88% dividend, versus 1.9% yield for the S&P 500. In terms of performance, XLU has outperformed the S&P 500 by 16.6% over last 5 years.
Over the last 5 years, S&P 500 has gained 53.77% while XLU is up 70.42%.
Why this out performance? Starting in 2019, fears of an upcoming recession were high, US 10 year and 2 year bond yields inverted, which essentially means the 2 year bond has a higher yield than the 10 year bond.
As well, the United States is in a trade war with China, which means tariffs will increase prices on goods imported from China which will hurt consumer spending domestically.
Since Utility Stocks are considered “safe”, investors buy them up to safeguard their portfolios against an economic downturn while collecting higher dividend yields. People will still consume water and power their homes during recessions, hence the “safety” concept.
How to Use Excel Worksheet of Utilities Dividend Paying Companies
Click here to download the Microsoft Excel workbook containing all 28 utility stocks included in the S&P 500. This is how to analyze and work with the spreadsheet.
- Highlight all cells from Column A to J.
- Click on “Data” tab, hit “Sort” button.
- In Sort By, select Dividend Yield.
- In Sort On, select Values.
- In Order, Select Largest to Smallest.
This query will show utility stocks with the highest dividend yields in the S&P 500. It can also be filtered and sorted for more queries like utility stocks with the:
- Lowest dividend payout ratios
- Highest year to date performances
- Lowest price to earnings ratio
- Highest market capitalization.
List of All Utility Dividend Stocks
Lets review our top utility dividend stocks below.
i) NextEra Energy (NEE)
NextEra is our #1 pick in the Utilities space because of its out performance to the S&P 500. While the S&P 500 has gained 54% over the last 5 years, NextEra Energy has returned a tremendous gain of 177% during the same period.
NextEra Energy is an electricity generating company operating through 3 subsidiaries:
- Florida Power & Light Company serves 5 million customers in the state of Florida.
- Gulf Power Company serves half a million customers in 8 counties in northwest Florida.
- NextEra Energy Resources generates renewable energy from the wind and sun.
NextEra Energy is the largest utility in America with a market capitalization of $116 billion. The company generated $16.727 billion in operating revenues in 2018 and earned a net income of $5.776 billion. This calculates to a net margin of almost 35%, which makes it a very profitable business.
However, the stock is not cheap at current prices of $237 per share because NextEra trades at a forward price to earnings (P/E) ratio of 28.27. In comparison, the S&P 500 trades at a forward p/e of 16.9. The stock has a dividend yield of 2.11%.
How does growth look in to the future? Management expects adjusted earnings per share growth of 6% to 8% annually through to 2022. The company has grown its dividend from a modest $1.20 per share in 2003 to a scrumptious $4.44 per share in 2018, a compounded annual growth rate (CAGR) of 9.1%. In its investor presentation slide, the company states “No management in the industry is more aligned with shareholders than NextEra Energy.”
We really like this statement, as well as the company’s solid abilities to make accretive acquisitions adding to the bottom line. In fact, the adjusted earnings per share has grown from $2.48 per share in 2003 to $7.70 as of 2018, a compounded annual growth rate of 7.8%.
ii) American Electric Power (AEP)
American Electric Power (AEP) is our #2 pick due to its strong out performance to S&P 500. Over the last 5 years, AEP has gained 99.38% while the S&P 500 has gained 53.85%.
American Electric Power (AEP) is the largest investor owned electric utility in America that serves 5.4 million retail customers in Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia.
Headquartered in Columbus, Ohio, American Electric Power has a market capitalization of $46.6 billion along with a dividend yield of 2.97%. This is 100 basis points higher than the yield provided by the S&P 500. The company generated $16.19 billion in revenues for the 2018 fiscal year and earned a net income of $1.93 billion. That is a net profit margin of 12%.
In terms of valuation, AEP trades at a forward price to earnings (P/E) ratio of 22.6 versus the S&P 500 which trades at 16.9. The company has a 5 year net dividend growth of 6% which is very respectable.
We do not like this stock at current price levels because of elevated valuation, however a 10% to 15% pullback in the overall market would present a tremendous buying opportunity.
American Electric Power has a prestigious track record of paying quarterly dividends for the past 109 years, with a targeted dividend payout ratio of 60% to 70% of operating earnings. The company is expecting a total shareholder return of 10% for the next few years delivered by earnings per share growth as well as the decent 3% yield.
The risks of investing in this stock or any other utility company is a high debt load. American Electric Power has a high debt load of $21.65 billion, and any increases in interest rates could take a bite out of earnings.
iii) American Water Works Company (AWK)
American Water Works Company (AWK) is the largest water and waste-water utility founded in 1886 that serves over 14 million people in 46 states as well as Ontario, Canada. The company’s water operations operate in about 1600 communities across the United States with a significant number of customers in New Jersey, Pennsylvania, Missouri, Illinois and California.
56% of the company’s operating revenues are generated from residential customers while 21% comes from commercial customers.
Trading on the New York Stock Exchange, American Water Works Company has a market capitalization of $21.88 billion with a dividend yield of 1.6%. The company generated $3.44 billion in operating revenues in 2018, a 2.5% increase from 2017 revenues of $3.357 billion. The company earned an operating income of $1.102 billion. This equates to 32% operating margin which is very healthy.
Over the last 10 years, American Water Works Company has gained 710.75%, crushing the performance of the S&P 500 which has gained 193.33%. This is a superb out performance of over 517%.
The reason for this crushing growth is due to 74 acquisitions the company has made between 2015 and 2019 adding 110,000 water customers. The stock’s valuation is extremely expensive as it trades at forward price to earnings (PE) ratio of 33, while the S&P 500 trades at almost 17 times forward earnings. American Water Works has grown its dividend at 10% per year over the last 5 years.
How does management see growth in to the future? The company expects earnings per share (EPS) growing at the top half of 7% to 10% using compounded average growth rate between 2019 to 2023. In its investor presentation, the company expects earnings growth of 1-2% in market based businesses, 1-2% from acquisitions and 5-7% in Capital investments.
We like the company’s fundamental strategy of making small acquisitions of between 3000 to 30,000 Water customers in geographic proximity to where the company currently operates. This lowers costs of doing business and adds accretive earnings to the income statement.
iv) Xcel Energy (XEL)
Xcel Energy provides electricity and natural gas services to 3.6 million electric customers and 2 million natural gas customers in 8 mid-western and western states including Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin. Xcel Energy has a vision to serve all its customers with 100% zero-carbon emissions by the year 2050.
Its business segments are divided in to 4 operating companies:
- NSP – Minnesota
Xcel Energy generated $11.54 billion in revenues for 2018, a 1.2% growth over 2017 revenues of $11.404 billion. Net income was $1.261 billion, implying a healthy net profit margin of 11%.
Trading on the Nasdaq Stock Exchange, Xcel Energy has a market capitalization of $32.74 billion and pays a dividend yield of 2.6%. Over the last 10 years, Xcel Energy has gained almost 380% crushing the performance of the S&P 500’s 193% rise.
In terms of valuation, Xcel Energy trades at a forward price to earnings ratio (PE) of 24 times, which is a 40% premium to the forward PE of the S&P 500 index (17 times earnings).
Strong history of dividend and earnings growth are the best traits of this utility stock. Xcel Energy paid its first dividend in 1959 and has grown its earnings per share at a compounded annual growth rate (CAGR) of 6.1%. The company earned $1.15 in earnings in 2005. Full year 2019 earnings are expected to be at $2.55 per share.
Revenues come from diversified streams including electric, natural gas and others. The largest source of revenues are electric retail customers at $2.91 billion, commercial & industrial at $4.87 billion as well as wholesale & transmission revenues.
In its 2019 Investor Presentation, management expects total shareholder return between 7% to 10% over the next several years made up from the 3% dividend yield and 5-7% earnings per share growth.
Balance sheet looks strong with almost $46 billion in assets and $13.5 billion in short term liabilities and $15.8 billion in long term debt.
v) WEC Energy Group (WEC)
WEC Energy Group (WEC) is an electric and natural gas services provider to 4.5 million customers in Wisconsin, Illinois, Michigan and Minnesota operating under various companies including Peoples Gas, Minnesota Energy Resources, Michigan Gas Utilities, Wisconsin Public Service, We Energies, WEC Infrastructure & North Shore Gas.
Each of these companies conducts business in a specific region, e.g. Peoples Gas provides natural gas to 869,000 customers in Chicago city while WE Energies delivers electricity and natural gas to 2.2 million customers in the state of Wisconsin.
The company generated $7.68 billion in operating revenues in 2018, a 0.4% growth over 2017 revenues of $7.649 billion. Operating income was $1.468 billion, implying an operating profit margin of 19%.
Trading on the New York Stock Exchange, WEC Energy Group has gained 489% over the last 10 years, handily crushing the performance of the S&P 500.
Buying this stock at current prices is not recommended due to expensive valuation. WEC Energy Group trades at a forward price to earnings (PE) ratio of 26.23, a 54% premium to the valuation of the S&P 500 which trades at a forward PE of 17.
The dividend yield on WEC Energy Group is 2.55% and the company’s current market capitalization stands at $29.16 billion.
How does growth look in to the future? In its September 2019 Investor Presentation, the company highlights a 7.1% compounded annual growth rate (CAGR) in earnings per share (EPS) from 2015 to 2018. It expects to continue this performance at a rate between 5% to 7% in to 2019 and beyond.
In terms of dividend growth, WEC Energy Group has raised its dividend from $0.80 per share in 2010 to $2.36 in 2019, providing an impressive compounded annual growth rate (CAGR) of 11.4%.