Stocks in the utility sector are known for providing investors with income and restful nights because of the regulated nature of the industry. But there's a change coming on the demand side of utilities that will help boost growth in what has long been a sleepy industry.
Here's why you might want to buy high-yield utility stocks like Dominion Energy (D 0.67%) and Black Hills (BKH) right now.
Demand is on the rise for utilities
In 2021, the Energy Information Administration put out a report saying it expected energy demand to increase by 22% between 2020 and 2040. That's a huge increase from the 9% growth in electricity demand experienced between 2000 and 2020. That 20-year estimate was raised again in 2024, jumping to 38% growth. And in 2025, the estimate rose again, to 55% growth.
That's six times the increase that was seen in the previous 20-year period.
Image source: Getty Images.
The big driver behind this shift is threefold: Artificial intelligence (AI), data centers, and electric vehicles (EVs). Over the next decade, demand from AI and data centers is expected to increase by 300%. By 2050, demand from EVs is expected to rocket higher by 9,000%. This is a no-brainer opportunity for dividend investors because you don't have to do anything materially different to benefit. Utilities, a typical dividend investment, are attractive today, and it looks like they will be even more attractive in the future as they serve the increasing demand for power.
Dominion Energy offers a high yield and works toward dividend growth
Dominion Energy has been a difficult stock to appreciate for a few years. It cut its dividend as it revamped its portfolio of assets, slimming down to what is now just a pure-play electric utility. It is currently focused on reducing leverage and lowering its payout ratio so that it is more in line with industry peers. It will probably take a couple more years before the dividend is growing again. That's the bad news, and it's a big part of why the stock has a 4.7% dividend yield while the average utility is offering 2.9%.
What's interesting about Dominion Energy is that it has a monopoly on the delivery of power in one of the largest data center markets in the world. It is seeing extremely strong demand for power from data center customers. This, plus a large offshore wind project that is in the works, is expected to support 5% to 7% annual earnings growth over the foreseeable future.
If you buy today, you can collect a well-above-average yield while you wait for management to get the dividend growing again. When the dividend is growing again, Wall Street is likely to afford the stock a higher premium. This is a fairly low-risk turnaround story if you are willing to step aboard.
Black Hills is small, but it has a mighty dividend record
Black Hills is at the other end of the dividend growth spectrum from Dominion. That's because Black Hills has increased its dividend annually for 55 consecutive years, making it a Dividend King. It is one of the few utilities to have achieved this level of dividend consistency, but it is relatively underfollowed on Wall Street because it has a tiny $4 billion market cap.
Don't skip over this small utility, however, because it also has a well-above-average dividend yield of 4.6%. A high-yield Dividend King operating in a boring, regulated industry isn't something to miss out on. Especially as that industry is seeing increased demand. Black Hills expects growing demand in the markets it serves to lead to earnings growth of between 4% and 6% a year for the foreseeable future. That, in turn, should lead to a similar level of dividend growth. If slow and steady sounds good to you, Black Hills is a no-brainer investment idea to dig into.
Buy now and benefit from years of growing demand
Utilities aren't known for being exciting investments, but the business model appears set to shift into a higher gear as electricity demand increases. Dominion Energy is a solid turnaround play on this theme, while Black Hills is a sleep well at night option for those who prefer less excitement.
