In many cases, smart income plays offer limited share price upside.
Bond yields have been stuck within a range for several months. That's been good for the predictability of income, but there hasn't been much additional total return potential outside of the income component.
The dividend yield on the S&P 500 is down to just a hair over 1%. You can get a better yield targeting certain defensive and cyclical sectors, but the overall performance of those areas of the market has been mixed.
There is, however, one area of the market that offers an intriguing mix of income and growth. And it's probably one of the last places you'd expect to find it: utilities.
I'm about to make the case for why the Vanguard Utilities ETF (VPU +1.08%) could be one of the smartest income plays today.
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Utilities offer a durable, high-yield income profile
Utilities have historically been among the highest-yielding sectors of the stock market, as evidenced by the Vanguard Utilities ETF's current yield of 2.7%. Better yet, that yield has been durable over time.
NYSEMKT: VPU
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It's backed by a sector whose primary products are constantly in demand and resilient to economic swings. Balance sheet health is sensitive to interest rates (utilities tend to have high debt loads), but an overall defensive profile and steady revenue streams help make utilities one of the better income producers in the market.
But utilities have traditionally been mostly income with little growth. The artificial intelligence (AI) revolution is helping to change that perception.
The data center/electrification story offers unusual growth upside
AI takes a lot of power to operate. Data centers are popping up everywhere to handle demand, but they're still struggling to keep up. Being only in the early innings of the AI build-out, it's reasonable to think the power demand is going to continue rising meaningfully for the foreseeable future. S&P Global expects data center power demand to have risen by 22% in 2025 and triple by 2030.
Whether utilities can keep up with AI-related demand is in question. Companies will likely need to spend heavily on infrastructure over the next several years to keep up. That level of capital spending could impact earnings and the potential for share price appreciation, but it's the strongest growth catalyst the sector has seen in years.
Overall, investing in utilities is becoming more of a growth-and-income play than a pure defensive income opportunity. The current yield is high enough to satisfy income seekers, but the growth story adds another layer of potential growth on top.
That makes the Vanguard Utilities ETF a smart play to capture both opportunities.
