These days, the news cycle is driving the show. It seems that every day, how the market finishes is 100% based on what’s going on with the trade war, what the Federal Reserve is doing, or just how good or bad the data has been. For conservative or investors near or in retirement, it can be maddening. Which is why utility stocks could be the best thing for their portfolios.
After all, utility stocks feature plenty of steady cash flows and high dividends. It doesn’t matter so much what the economy is doing as people still need to heat their homes, keep the water flowing, and power the lights. This steadfastness makes utility stocks a prime choice for conservative investors. And now with the Fed decreasing rates, other investors tend to like them too.
No wonder why the sector proxy — the Utilities Select Sector SPDR ETF (NYSEArca:XLU) — has gained over 21% year-to-date. That’s before dividends.
As you can see, there is power in owning the power producers. For conservative investors, the sector’s strength and boring nature really do pay plenty of benefits in a market like this. With that, here are five utility stocks worth buying today.
Utility Stocks Perfect For Conservative Investors: UGI (UGI)
Dividend Yield: 2.58%
For conservative investors looking at utility stocks, they should focus on the number 33. That’s the number of consecutive years that utility UGI (NYSE:UGI) has managed to increase its dividend for. And given its recent moves, it should be able to add 34, 35, and so on to that impressive streak.
The key is that UGI has been smartly using the utility holding company model to its advantage.
UGI owns plenty of boring electric and gas operations in the Northeast. These regulated assets provide the utility stock with plenty of steady cash flows. The firm has been using these cash flows to fund non-regulated and tangential assets. These assets provide higher profit margins and an extra boost to its bottom line.
A prime example would its recent buyout of Columbia Midstream Group. UGI already owned several FERC regulated interstate natural gas trunk lines in the region. With the addition of Columbia, the utility now gained several gathering and processing assets that feed into its pipeline system. This allows UGI to instantly see scale and additional profits.
This strategy seems to be working for UGI. Last year was one of its best on record and the gains have continued this year as well. Adjusted EPS for last quarter — after accounting for the buyout of its MLP subsidiary AmeriGas — jumped more than 44% year-over-year.
With profit gains like that, UGI should have no problems hitting its 4% annual dividend growth targets.
York Water (YORW)
Dividend Yield: 1.77%
If you had to guess what stock has been paying dividends the longest, names like Coca-Cola (NYSE:KO) or Proctor & Gamble (NYSE:PG) may come to mind. But the title goes to a small and overlooked utility stock that may just be perfect for conservative investors. We’re talking about humble York Water (NASDAQ:YORW) and its dividend streak of 203 consecutive years.
York has been paying a dividend since its founding in 1816. The key comes from its operating niche. Water utilities are often monopolies in their operating regions. Moreover, they are heavily regulated. In this case, YORW provides water and treatment for 48 municipalities with York and Adams Counties in Pennsylvania. What’s great about York is that it really has tried to grow massive like some water utilities. It just does what it does. Because of this, its results run like clockwork.
And York has been pretty successful at winning rate increases from regulators. The latest one was approved at the start of the year. Given water’s highly regulated nature, these rate increases provide just enough oomph to pay for rising costs, upgrades and boost profits. And York has handed those profits back via dividend increases. The latest one was a 4.4% jump.
The reality is, YORW is not going to set your portfolio on fire and grow 1500%. But it what it can do is provide plenty of stability and income potential. Exactly what utility stocks should do.
Consolidated Edison (ED)
Dividend Yield: 3.24%
No list of stodgy utility stocks can be complete with Consolidated Edison (NYSE:ED). ConEd has been providing electricity, steam and natural gas for metropolitan New York for more than 180 years. And it turns out this niche of powering New York City, Westchester and parts of New Jersey is a very good one to be in. Thanks to their growing populations, steady economies and overall top-notch fundamentals, ConEd has become a profit and dividend champion.
And the growth could keep coming. That’s because ConEd has started to upgrade and make its system more high-tech.
For starters, that includes plenty of renewable and solar energy projects in its operating region. Con Edison is actually the second-largest solar energy producer in North America. Secondly, ConEd has begun to roll-out new smart-meters and demand-response programs. This includes across its electric and natural gas operations. Here, consumers are rewarded for using less power at peak times. But for ConEd, this can be huge cost savings.
Already, the utility has been struggling to meet the needs of New Yorker’s when it comes to gas demand. It’s simply having to buy more gas from third party players to meet the demand. Those costs are hurting its bottom line. With demand response, ED should be able to save a few dollars and reduce its outlays for gas. Even better is that regulators have allowed the utility to pass on the smart-meter costs to consumers. For ED stock, it’s a win-win.
It’s a big win for investors as well and should help keep the dividends flowing at ED for years to come.
NextEra Energy (NEE)
Dividend Yield: 2.22%
Speaking of renewable energy, no utility stock is better at it than NextEra Energy (NYSE:NEE). That’s because like previously mentioned UGI, NEE has managed to use the utility holding company model perfectly.
To start with, NextEra owns plenty of regulated utility assets in the sunbelt. These more than 4.6 million customers provide plenty of stable cash flows into its coffers and used those cash flows to build-out its non-regulated assets. More specially, NextEra has become the largest producer of solar and wind power in the United States. The best part is that renewable energy has finally hit parity with traditional fossil fuels in many cases. And given the lower costs to maintain a solar or wind farm, margins are getting quite juicy at NEE.
NextEra is able to sell excess power produced at these solar farms to other utilities looking to meet new regulations or fill their own power needs. At this point, it’s just easier for them to buy power from NEE than build a renewable energy farm on their own.
For NEE this has meant plenty of profit growth over the years. Since 2003, EPS has managed to grow at a CAGR of nearly 8% per year. For a utility stock, that’s a very strong rate of growth. And NextEra hasn’t been shy about handing out excess cash to investors. Dividends have grown by over 9% in that time.
With its business model continuing to see benefits, NextEra represents one of the best utility stocks out there for investors.
Vanguard Utilities ETF (VPU)
Dividend Yield: 2.73%
As the saying goes, there’s safety in numbers. To that end, a broader strategy may be best. Which is why investors may want to go with an ETF that covers the utility stocks. Surely, you could go with the previously mentioned XLU — and it’s a fine choice. But the Vanguard Utilities ETF (NYSEArca:VPU) might be a better pick.
The reason comes down to coverage. The XLU holds just 28 utility stocks. VPU, however, offers broader coverage given its inclusion of large-, mid- and small-cap firms. That wide-sweeping approach bumps its total number of holdings to 69 different utilities. This includes all of them on this list. Better still is that VPU also beats the SPDR on expenses — 0.10% vs. 0.13% — and in terms of current dividend yield.
Those slight differences in holdings, yield, and expenses have made VPU the better fund for the long haul. Over the last decade, the Vanguard ETF has managed to return about 12.46% annually. That’s just over a half a percent more per year than the SPDR. Investing is a game of inches and that slight difference compounded over time really adds up. And yet, asset and trading volumes for the VPU are equally as swift.
As a result, VPU should get the nod from investors looking for a broader approach to utility stocks. Given the market’s rising volatility, they may just want to do that.
At the time of writing, Aaron Levitt did not hold a position in any stock mentioned.