Two notable ones are debt-to-earnings before interest, taxes, depreciation, and amortization, or 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 below 4.5 times and a debt-to-capital ratio below 60%.
A conservative dividend payout ratio
A dividend payout ratio is the percentage of a company's profits paid to investors via its dividends. Utilities traditionally have higher dividend payout ratios than other companies. Most target a payout ratio of 60% to 70% of their earnings, well above the 40% average for 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) 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.
How to invest in utility stocks
Here's a step-by-step guide on how to add utility stocks to your portfolio:
- Open your brokerage app: Log in to your brokerage account where you handle your investments.
- Search for the utility stock: Enter the ticker or company name into the search bar to bring up the stock's trading page.
- Decide how many shares to buy: Consider your investment goals and how much of your portfolio you want to allocate to this stock.
- Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you're willing to pay.
- Submit your order: Confirm the details and submit your buy order.
- Review your purchase: Check your portfolio to ensure your order was filled as expected and adjust your investment strategy accordingly.
Utility industry trends and what they mean for investors
Utilities are benefiting from two major tailwinds. First, the shift to cleaner energy is pushing companies to invest in natural gas, nuclear, and renewables. Second, electricity demand is rising as electric vehicles, automation, and AI data centers use more power. Both trends support long-term infrastructure spending and growth.
Strong utility companies pair these growth drivers with solid finances, which helps them invest in expansion while raising dividends. With steady demand, regulated pricing, and ongoing infrastructure needs, leading utilities can grow earnings even in slower economies. For investors seeking income and relatively stable growth, that combination can be appealing.
