3 Top Utility Stocks to Buy in December

Utilities are generally considered income stocks, so rising interest rates have been a headwind as they make other income options (like CDs) more attractive. If you are a long-term investor, however, this could be an opportunity to add some well-positioned utilities to your portfolio. Three that are worth considering this December are Duke Energy (DUK -1.33%), NextEra Energy (NEE -1.36%), and Black Hills (BKH -0.63%). Here's why.

Duke Energy is getting back to basics

Duke Energy is one of the largest regulated electric and natural gas utilities in the U.S., with a market cap of around $70 billion. It recently sold a contract renewable power business, which has left it with only regulated operations. This is a case of a utility getting even more boring, since regulated utilities have monopolies in the regions they serve but have to get capital investment plans and rates approved by the government. That generally results in slow but steady growth over time.

Today, Duke Energy has a capital investment budget of roughly $65 billion dollars. That money will be spent on things like new capacity and asset improvements (storm hardening, for example) over the next five years. This backs management's belief that it can provide earnings growth of between 5% and 7% a year through at least 2027. That, in turn, should support annual dividend increases that will extend the current 19-year annual dividend increase streak well into the future. With a dividend yield of 4.3%, even conservative dividend investors will probably want to dig into this story.

NextEra Energy is like two businesses in one

NextEra Energy is a dividend growth machine, with annual increases in each of the past 29 years and an annualized dividend growth rate of more than 10% a year over the past decade. That's incredibly fast dividend growth for a utility. The question for income-focused investors is how the company is managing to grow the dividend so quickly. The answer is by being two companies in one.

The core of NextEra Energy is Florida Power & Light, one of the largest regulated utilities in the U.S. Notably, it operates in a state that has seen a steady inflow of residents (and thus new customers) for years. That's the foundation on which NextEra Energy has built a clean energy business that is now one of the largest producers of solar and wind power on Earth.

The regulated utility (about 70% of the business) should continue to be a slow and steady performer, while the clean energy business (about 30%) should drive long-term growth. Notably, management expects this combination to support 6% to 8% earnings growth through 2026 with 10% dividend growth through at least 2024.

The current dividend yield of around 3.1% is near the high end of the range over the past decade, suggesting that now could be a great time to add this dividend growth stock to your portfolio.

Tiny Black Hills has a big streak

Duke has increased its dividend for 19 years. NextEra's dividend has grown annually for 29 years. And Black Hills is a Dividend King, with over 50 consecutive annual dividend increases. While NextEra is an industry giant with a $120 billion market cap, its dividend record is easily bested by Black Hills, which has a $3.6 billion market cap.

That said, Black Hills, like Duke, is essentially just a boring regulated utility, so dividend growth (roughly 5% a year over the trailing one-, three-, five-, and 10-year periods) isn't as robust as industry giant NextEra and probably never will be.

However, for investors interested in a reliable dividend, 5% annual dividend growth should be more than enough to keep them happy. Right now Black Hills' yield is 4.6%, which is toward the high end of the yield range over the past 10 years. That could make now a good time to add this reliable dividend payer to your income portfolio.

But investors should go in knowing that leverage is a bit high today, leading management to pull back on capital investment plans in 2023 in favor of debt reduction. That could limit growth for a bit, though the company has plans to increase spending again in the coming years.

Boring, but attractively priced

Duke Energy is 12% below its 52-week high. Black Hills is off its 12-month high by 27%. And NextEra is lower by 32%. If you are looking for an opportunity to add reliable dividend stocks to your portfolio, now is the time to consider these utilities. Duke is the most boring, NextEra the most exciting (particularly for dividend growth investors), and Black Hills is the under-the-radar pick. But if you can stomach buying while others are selling, all three appear attractively priced today.