Utilities are generally income-oriented investments favored by conservative investors. Rising interest rates have made income-generating alternatives such as CDs increasingly competitive, which has in turn driven down utility stock prices -- pushing their yields up and keeping them competitive as investments.
If you are willing to take on the extra risk of owning stocks, given the potential benefit of dividend growth, now could be a great time to consider utility stocks like Black Hills (BKH -0.63%), NextEra Energy (NEE -1.36%), and Brookfield Renewable (BEP 0.19%) (BEPC 0.09%). Here's why these three stocks are great buys in November.
1. Black Hills is a simple, boring utility
Of the three companies under consideration here, Black Hills is by far the simplest. It operates natural gas and electric operations in eight states, serving around 1.3 million customers. By utility standards, it isn't particularly large, with a market cap of around $3.2 billion. But what it lacks in scale, it makes up for in reliability: It is a Dividend King with 53 consecutive years of annual dividend increases under its belt.
There are some headwinds right now, and the company is focusing on paying down debt to keep its interest expenses in check. That has meant less capital spending in 2023, but management plans to compensate for that in future years. That said, the impact is likely to be a brief slowdown in business growth on top of the hit that is already being felt from rising interest rates. That has investors in a dour mood, but management is still positive about the long term, looking for annual earnings growth in the 4% to 6% range. If you think in decades and not days, Black Hills working to strengthen its balance sheet is probably more of a positive than a negative. Now would be a good time to examine this utility stock, which has a yield of 5.2% at the current share price.
2. NextEra has a boring core business and an exciting growth business
NextEra is really two companies in one. It owns the largest regulated utility in the United States, Florida Power & Light, which has benefited from the ongoing migration of people into the low-tax, warm-weather state. Slow and steady is the name of the game here. On top of that is layered one of the world's largest businesses dedicated to owning, operating, and building renewable power. This is NextEra's growth engine.
Historically, this combination of businesses has been attractive, allowing NextEra to increase its dividend annually for more than a quarter of a century. And over the past decade, those hikes have been at an average annualized rate of more than 10%. NextEra is thus a growth and income story.
Normally, Wall Street places a premium valuation on the company, but higher interest rates and some headwinds in the renewable power sector (headwinds that are in part the results of higher interest rates) have changed investor sentiment toward NextEra. The shares have fallen sharply, pushing the dividend yield up toward 10-year highs at roughly 3.2%. While that's historically high for NextEra, it isn't particularly high for a utility. Still, if your main focus is on dividend growth, this could be the stock for you. Despite the headwinds, management's goal continues to be 6% to 8% annualized earnings growth for the foreseeable future.
3. Brookfield Renewable isn't exactly a utility, but it's still attractive
Brookfield Renewable stock comes in two forms -- a partnership and a corporation. They both represent the same entity, with the corporation created so that investors unable to buy shares of partnerships could still own Brookfield Renewable (thus increasing the company's access to capital).
The big draw here is that Brookfield Renewable is hyper-focused on the clean energy future, owning a portfolio of hydroelectric, solar, wind, and energy storage assets around the world. That said, Wall Street has soured on renewable stocks of late, thanks to rising construction costs and higher interest rates (which makes funding projects more expensive), leading to a roughly 35% decline in Brookfield Renewable's price. But the future remains bright longer term.
Brookfield Renewable has a portfolio that produces around 32 gigawatts of power, and a pipeline of future projects that will produce roughly 134 gigawatts. The next three years should see around 18 gigawatts of that pipeline commissioned, which gives you an idea of how long a growth runway there is here. The dividend yield is around 6.2% for the partnership and 5.7% for the corporation. The partnership -- the entity with the longer history -- has increased its dividend annually for nine years (including in 2023) at a compound annual rate of about 6%, which is in the middle of management's long-term target. If you are looking for a renewable power play with a generous yield and solid growth prospects, the sell-off in Brookfield Renewable could be just the opportunity for which you have been waiting.
Strong options among utility stocks
I certainly would not suggest that Black Hills, NextEra Energy, and Brookfield Renewable are the only utilities worth looking at now. But they are three of the best, and each of them offers something unique to different types of investors. If you are looking at the down-and-out utility sector in November, this trio should probably be high up on your watch list.
