2019 was a stupendous year for the markets overall, with stocks in "boring" sectors like utilities also joining the rally. The Dow Jones Utility Index, which measures the performances of the 15 largest utility stocks listed in the U.S., rose a solid 23% in 2019. Strong earnings growth was a key driving factor for the sector, even as investors wary of the growing global geopolitical and economic concerns dipped their fingers into dividend-paying defensive utility stocks.

2020 could be another good year for utilities, but if you really want to buy some utility stocks now, you need to look beyond one year and find companies that are positioning themselves for growth in the years to come. Consolidated Edison (NYSE:ED), Dominion Energy (NYSE:D), and Xcel Energy (NASDAQ:XEL) are three such attractive utility stocks.

There's one common link -- or, rather, a growth driver -- among these utilities: investments in clean and renewable energy.

Powered by solar

Consolidated Edison runs two primary regulated electricity and gas units: Consolidated Edison Company of New York and Orange & Rockland Utilities. Together, the two units supply electricity to nearly 3.6 million customers and gas to roughly 1.2 million customers in and around New York City. But Con Ed isn't just any other utility. 

Photo-voltaic solar panels at sunrise.

Image source: Getty Images.

Not many know that Con Ed is now the second-largest solar power producer in North America thanks to its acquisition of solar assets from Sempra Energy last year. While clean energy currently contributes only 6% to the company's earnings (adjusted), Con Ed expects that to double in the next couple of decades. Between 2019 and 2022, the company aims to pump $1 billion into its clean energy business.

Investment in clean energy should supplement Con Ed's other growth plans. Overall, the utility aims to invest $12 billion through 2022, with the bulk of it going toward modernizing and expanding its utilities. That's necessary, as regulated utilities are required to spend money on upgrading assets to get any hikes in rates approved by the regulatory authorities. So far, Con Ed has delivered well, as evidenced by the stability in its earnings and cash from operations in recent years.

ED Cash from Operations (TTM) Chart

ED Cash from Operations (TTM) data by YCharts.

With plenty of cash flowing in, Con Ed decided to reward shareholders more richly by increasing dividends at a compound annual rate of 3.3% in the past five years compared to 1.3% between 2010 and 2014. Con Ed, in fact, is a Dividend Aristocrat with an unbeatable 45-year streak of consecutive annual dividend increases. That's among the best in the sector. With a comfortable long-term target dividend payout of 60% to 70% of adjusted earnings, capital expenditure plans in place, and renewed focus on clean energy, Con Ed shouldn't fail patient investors. 

Largest wind farm in the making

Dominion Energy has long been one of my favorite dividend stocks, and I still recommend the stock today despite a slowdown in dividend growth.

Dominion spooked income investors mid-last year when it announced a decelerated growth rate for dividends. So after two consecutive years of 10% hikes in dividends, Dominion increased its dividend by only 2.5% in December 2019 and expects to maintain this rate in the foreseeable future. So why should you still invest in this stock?

You see, Dominion still expects its operating earnings per share to grow at an encouraging compound annual growth rate (CAGR) of 5% between 2020 and 2023. More importantly, a lower dividend payout is more a near-term pain but a potential long-term gain for shareholders, simply because Dominion is freeing up cash to invest in growth and maintain its investment-grade credit rating. A good rating broadly confirms a manageable debt level and the company's ability to repay debt.

Dominion, which currently serves 7.5 million customers across 18 states, projects its base rate to grow at a CAGR of 7% between 2018 and 2023, driven by a 40% rise in the value of total property. The company plans to spend $26 billion across operations between 2019 and 2023, including the Atlantic Coast pipeline. Beyond 2023, its proposed largest offshore wind farm in the country, with more than 200 wind turbines, will be the project to watch. By 2030, Dominion aims to reduce carbon emissions by 55%.

In short, Dominion Energy has a lot going for it and remains a top utility stock to own.

The utility that's winning with oil and gas

Xcel Energy was among the top-performing utility stocks last year, powered by strong earnings and cash flows. Xcel supplies electricity to 3.6 million customers and natural gas to 2 million customers through four operating companies across eight Western and Midwestern states, including the Permian oil and gas basin region located in western Texas and southeastern New Mexico. The Permian Basin, in fact, is proving to be the most lucrative region for the utility in recent months. Xcel intends to spend $3.8 billion, or 17% of total planned capital spending, on its Southwestern Public Services (SPS) utility through 2024. SPS serves Texas and Mexico.

ED Chart

ED data by YCharts.

What I like most about Xcel is its clearly outlined goals for the long term. For instance, Xcel expects growth in the next five years to be driven by investments in natural gas, transmission, and grid advancement, and conscious efforts to replace coal with cleaner energy sources to fire up its plants. Xcel, in fact, was the first utility to pledge carbon-free operations by 2050. The company also foresees opportunity in electric-vehicle infrastructure.

Management's medium-term goals look encouraging:

  • 5% to 7% growth in earnings per share
  • 5% to 7% compound annual growth in dividend
  • 60% to 70% dividend payout ratio
  • Approximately 3% dividend yield and total shareholder returns of 8% to 10%

A strong base rate growth, combined with its focus on renewables, should help Xcel Energy unlock greater value for shareholders in the years to come.