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Matthew DiLallo has positions in NextEra Energy and NextEra Energy Partners. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool recommends Duke Energy. The Motley Fool has a disclosure policy.
Several publicly traded companies operate electric utilities, giving investors lots of options in this sector. Three that stand out as being among the best in the electric utility sector are:
Here's a look at what makes this trio stand out as solid electric energy stock investments.
Duke Energy is one of the largest power company stocks in the country. It operates two business segments:
Duke Energy's utility portfolio generates steady revenue regulated by government agencies that set its rates. That provides it with stable cash flow to pay dividends (it offered a more than 3.5% dividend yield in mid-2024) and expand its utility businesses.
A couple of factors help Duke Energy surpass many electricity stocks. It complements its steady revenue-generating energy businesses with a strong financial profile (including an investment-grade credit rating). It also has a conservative dividend payout ratio, giving it the flexibility to invest in cleaner energy.
Duke Energy is investing heavily in enhancing its operations and reducing its carbon footprint. Its investments should grow its earnings per share at a 5% to 7% annual rate through 2028, a healthy rate for a large utility. It should give the company plenty of power to grow its dividend. These drivers should help it supply investors with an attractive total return of around 10% annually.
NextEra Energy is one of the largest electric utilities in the country. It has three business platforms:
NextEra Energy's business segments generate stable cash flow from regulated rate structures and long-term contracts, helping to support a dividend that yielded more than 2.5% in mid-2024.
The company has all the qualities an investor would want in an electricity stock. It routinely has one of the highest credit ratings among large, rate-regulated electric utilities. It also typically has a lower-than-average dividend payout ratio, giving NextEra the financial flexibility to invest in cleaner energy while building more renewable power projects.
NextEra's current slate of investments should expand its earnings by 6% to 8% annually through 2027 and power dividend growth of 10% per year through at least 2026, which is above-average growth for the sector. It could help NextEra generate industry-leading total stock returns. Those features position NextEra Energy to continue generating market-beating total returns.
Xcel Energy operates four electric and natural gas utilities across eight states in the central United States. Its utilities serve 3.8 million electric customers and 2.2 million natural gas customers. The energy businesses generate predictable rate-regulated revenue, giving it the power to support an attractive dividend that yielded more than 3.5% in mid-2024.
Xcel Energy's excellent qualities include an investment-grade balance sheet and a conservative long-term dividend payout ratio target of 50% to 60%. Its strong financial profile gives it the flexibility to invest in high-return expansion opportunities, such as replacing coal-fired power plants with wind power.
The company believes its investments can transform it into a cleaner electric utility. They also should help to increase its earnings per share by 5% to 7% annually. Along with its dividend, steady growth should give Xcel Energy the power to produce attractive total shareholder returns of about 8% to 10% per year.
It's important to know how to analyze electric utility businesses. That will allow you to find companies with the potential to generate attractive total returns. Three main factors have contributed to strong performance in the sector over the years:
Having a strong financial profile is vital for an electric utility. It needs to fund the maintenance and expansion of its infrastructure while also paying an attractive dividend to its shareholders. One of the key ways to gauge the financial strength of a utility is to see if it has an investment-grade credit rating on its bonds. That's similar to a high credit score, suggesting the borrower is at low risk of defaulting on its debts. An investment-grade rating means a company can borrow money at lower interest rates and better terms.
Utilities pay out a significant percentage of their earnings to investors via their dividends (usually around 65%). However, because financial strength is so important, investors should focus on electric utilities with lower-than-average dividend payout ratios. The lower ratios allow companies to retain more cash to finance growth, which enhances their financial strength.
The best utilities can steadily increase their earnings per share by investing in initiatives that earn high returns on investment. For example, utilities can improve their profitability by retiring aging and expensive coal-fired power generation plants and replacing them with cheaper, cleaner ones powered by natural gas or renewables. Likewise, they can increase their earnings by taking advantage of tax credits and other incentives to build out renewable energy projects.
Investors seeking electric utility stocks to buy should look for these three characteristics. These strengths should provide a company with the financial flexibility to steadily expand its earnings and its dividend. Those factors help power an attractive total stock return to shareholders -- the combination of a stock's dividend yield and its stock price appreciation.
It costs lots of money to build and maintain electricity generating plants and electrical distribution systems, so governments give electric utilities a monopoly to operate in a specific region. Government entities then regulate these companies by approving the rates and fees they can charge customers for providing electricity. As a result, electric utilities generate predictable revenue -- a desirable feature for those seeking lower-risk investments.
Electric utility stocks also typically pay investors a dividend, which is a cash payment of a portion of the company's profit. Utilities generally offer an above-average dividend yield -- the ratio of a company's annual dividend to its stock price -- because they choose to pay out a larger share of their profit instead of retaining it to expand their operations. The sector's higher dividend yields make these stocks attractive income investments for retirees.
Electric utility stocks are publicly traded companies regulated by government agencies. They make money by providing reliable energy to customers. Here's a closer look at how to invest in the electric utility industry.
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