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Investing in Top Utility Stocks

Updated: Nov. 4, 2021, 11:28 a.m.

Utilities provide electricity, natural gas, and water and wastewater services to residential, commercial, industrial, and government customers.

Utility stocks typically make stable investments. Demand for utility services tends to remain steady, even during a recession. Meanwhile, the rates they charge for delivering these services are either regulated (approved by a government entity) or contractually guaranteed (nonregulated). Because of that, utilities generate reliable earnings, enabling these companies to pay dividends with above-average yields.

That combination of predictable profitability and income generation makes utility stocks lower-risk options for investors. As a result, they’re often ideal options for retirement income strategies.

However, not all utility stocks deliver competitive investment returns. The best utilities share additional noteworthy characteristics that give them the power to outperform. With that in mind, here are some top utility stocks to buy and what to look for in a utility investment.

3 top utility stocks to buy

The best utility investments are companies with a top-notch financial profile and visible growth prospects. Each of the companies below meets those criteria and has the potential to produce above-average total stock returns -- dividend yield plus stock price appreciation:

Top utility stock Ticker Symbol Dividend Yield
American Water Works (NYSE: AWK) 1.3%
Brookfield Infrastructure (NYSE: BIP) (NYSE: BIPC) 3.2%
NextEra Energy (NYSE: NEE) 1.8%

1. American Water Works

American Water Works is the largest publicly traded water and wastewater utility in the U.S. It makes most of its money by providing regulated water and wastewater services, with the rest coming from less predictable market-based activities, including providing water-related services to homeowners and the military.

American Water Works expects to increase its earnings per share (EPS) at a compound annual rate of 7% to 10% between 2021 and 2025, which would make it one of the fastest-growing utilities in the country. The main driver of its outlook is a multibillion-dollar investment program to expand its regulated operations.

The water utility has the financial flexibility to support its expansion plan thanks to its top-tier financial profile. Credit rating agency S&P Global (NYSE:SPGI) has an A rating on its credit, making it one of the few utilities at that top level. Meanwhile, it has a very conservative dividend payout ratio (it has targeted an average between 50% to 60% of its adjusted EPS). That strong financial profile has led American Water Works to forecast dividend growth of 7% to 10% per year through 2025.

2. Brookfield Infrastructure Partners

Brookfield Infrastructure owns a diversified portfolio of utility-like infrastructure businesses, including:

  • Regulated utilities: Regulated electric and natural gas transmission and distribution businesses and a port terminal.
  • Transport: Railroads, toll roads, ports, and liquified natural gas (LNG) export operations supported by long-term contracts or regulated rates.
  • Energy: Oil and natural gas midstream assets backed by long-term contracts or regulated rates.
  • Data infrastructure: Data centers, cell towers, fiber-optic cables, and data transmission assets supported by long-term contracts with customers.

Brookfield Infrastructure operates several utilities and utility-like businesses that generate predictable cash flow. It expects this portfolio to deliver 5% to 9% annual funds from operations (FFO) growth over the long term. On top of that organic growth, Brookfield anticipates that acquisitions could boost its FFO by up to 5% per year. Brookfield secured a large acquisition of an oil infrastructure company in Canada in 2021 that will likely generate utility-like cash flows and above-average growth for the company in the future.

Supporting Brookfield Infrastructure's long-term growth outlook is its top-notch financial profile. It has historically targeted a payout ratio of 60% to 70% of its cash flow. Further, it has a high credit rating for a company in the utility sector. Because of those factors, the company believes it can increase its dividend by a 5% to 9% annual rate over the long term.

3. NextEra Energy

NextEra Energy operates regulated electric utilities in Florida. It also owns and operates natural gas pipelines and renewable energy projects that generate predictable income backed by long-term fixed-rate contracts. NextEra expects these businesses to grow its EPS at a 6% to 8% compound annual rate through 2023. That’s faster than the EPS growth rate projections of its largest peers in the electric utilities sector, which are in the low- to mid-single digits.

Powering that above-average growth is NextEra’s ability to fund high-return expansion opportunities, thanks to its strong financial profile. That profile includes one of the highest credit ratings among the large rate-regulated electric utility companies and a dividend payout ratio that’s historically been below the sector average. Because of its lower payout ratio, NextEra plans to increase its dividend by roughly 10% per year through at least 2022.

Utilities workers with wind turbines

Source: Getty Images

What makes a good utility stock investment?

Utility infrastructure is costly to build and maintain. Because of that, a utility needs a strong financial profile to invest in maintaining and expanding its infrastructure while also paying an attractive dividend. Three metrics can help you gauge a utility’s financial strength.

An investment-grade bond rating

A bond rating or credit rating for a company is like a credit score for an individual. Companies with higher “investment-grade” bond ratings can borrow money at lower rates and on easier terms. That's important for utilities since they routinely need to borrow money to help fund maintenance and expansion projects. So, investors should seek out companies with high bond ratings since they can more easily finance their operations, which helps them increase their earnings and dividends.

Low leverage metrics

While utilities need to borrow money to finance their operations, too much debt limits their ability to grow. Because of that, investors should look for utilities with conservative leverage metrics for the sector. Two notable ones are debt to EBITDA (debt in relation to income) and debt to total capital (debt in relation to total value). Good targets for the sector are a debt-to-EBITDA ratio of less than 4.5 times and a debt-to-capital value of less than 60%.

A conservative dividend payout ratio

A dividend payout ratio is the percentage of a company's profits that it pays out to investors via its dividends. Utilities traditionally have higher dividend payout ratios than other companies. The average was more than 65% of earnings per share in 2021, well above the 40% average of higher-yielding stocks in the S&P 500. However, utilities with a relatively lower payout retain more cash to reinvest in expansion projects. Consequently, they don't need to borrow as much money (which would lower their credit rating) or issue as many new shares (which would dilute existing investors’ shares of their profits) in order to finance growth.

Utilities with stronger financial profiles have greater flexibility to invest in expansion projects and make acquisitions, positioning them to expand their earnings at an above-average rate. The extra fiscal strength also gives them more power to increase their dividends.

The best utility stocks offer above-average growth for less risk

These utility companies all have top-tier financial profiles. As a result, they have the flexibility to invest in expanding their operations while also increasing their dividends. Those dual growth drivers should give these utilities the power to produce attractive total returns for investors over the long term, making them stand out as excellent utility stocks to buy.

Related investing topics


What are utility stocks?

Utilities provide electricity, natural gas, and water and wastewater services to residential, commercial, industrial, and government customers. The steady demand for these services has helped utility stocks generate relatively stable earnings over the years.

What makes a good utility stock?

A list of standout companies, followed by our assessment of each investment:

  • American Water Works
  • Brookfield Infrastructure Partners
  • NextEra Energy

How do I invest in energy?

The energy sector is a challenging one for investors, especially oil and gas companies. Energy prices can change in a heartbeat, which can have a massive impact on the sector as well as the global economy. That became abundantly clear at the start of the COVID-19 pandemic.

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