When I play Monopoly, the first spot that I go for is one of the utilities. You can’t build on them, so they don’t have the unlimited wealth options of Boardwalk. But you’re guaranteed to make money just from buying the property.
That’s kinda what buying into utilities is like in the real world.
Utility stocks are solid buys for several reasons.
First, no matter what, we’re always going to need energy in our homes. It doesn’t matter what the prices of oil, natural gas, or renewables are. In the end, we need energy.
That’s what utilities provide.
The Wall Street Journal writes:
Companies that produce electricity have never been so popular. Buyers love the sector for its 3.3% dividend yield and for its terrific recent performance. The sector is up 21.9% this year, making it the second-best sector in the market, trailing only telecom, which yields 4.2%, according to FactSet:
Besides the yields, the utility industry is enjoying strong fundamentals that have boosted profits. When executives at electric utilities dream of the perfect world, it probably looks something like today.
Almost all utilities pay back dividends. And they’ve been historically high lately, at times paying back nearly three times more than companies on the S&P.
So, while utilities might not have the get-rich-quick feel that many stocks do, utilities guarantee a return on your investment — no matter what.
Another reason to invest in utilities? They’re getting into renewable energy, which is growing into a mammoth market. 2015 saw a global investment of over $280 billion in renewable energy.
And while some thought that renewables might be the death knell of utilities, they might end up making them rise even further.
A Power Plant Hybrid
I tend to think of lithium-ion batteries in terms of charging something relatively small, like my laptop, phone, or electric car.
I don’t think of them in terms of helping to run power plants.
But, as of a few weeks ago, they are.
Southern California Edison has created a kind of hybrid power plant, pairing a lithium-ion battery with natural gas systems to help the plant become more efficient and leak less.
Southern California Edison, General Electric Co. and Wellhead Power Solutions partnered to install 10-megawatt lithium-ion batteries... The plants are designed to fire up during periods of peak demand. The batteries, which can provide instant power while gas turbines ramp up, are expected to reduce fuel use and lead to emission reductions of at least 60 percent...
It’s rare to see renewable energy sources working in tandem with fossil fuels like natural gas. But with increasing calls for renewable energy, solutions like this hybrid plant are just the first steps toward combining various energy sources.
The general manager of GE Digital Grid Solutions, Mirko Molinari, says:
Really, you need to look at it as a unique system. It’s not comparable to a peaker, or to a pure battery. A pure battery at the end has the limitation of how long it can be on — and the gas has a limitation of how quickly it can start up. When you put them together, to some extent, you can run them forever.
While utilities might not be the hottest trend, they are a reliable one. With their market on necessities like water and electricity and also their high dividend rates, they make solid investments. Utilities combining forces with renewables will only make them more valuable, which means that you’ll be able to keep bringing in the cash.
To that end, we’ve found an ETF and two stocks that will help you jump into the utilities market.
Utilities Select Sector SPDR ETF (NYSE: XLU)
Utilities Select Sector SPDR ETF tracks utility companies and selects them from the S&P 500.
It has various methods in place for selecting utilities, which includes a market cap of $4.6 billion or higher, with viable financial earnings reports, and at least half of its shares available for public trading.
It selects from a variety of electric, gas, and multiuse utilities.
The fund has done particularly well in the past 18 months, jumping from December 2015 lows of $41.79 to the current share price of $51.40.
Its dividend yield is 3.27%.
Duke Energy (NYSE: DUK)
Duke Energy is an energy company that provides electricity to the southeastern part of the U.S., while also managing various power facilities.
DUK specifically has made a habit of having a good relationship with its shareholders via solid dividend yields throughout the years and a current dividend yield of 4.17%.
Its shareholder return from 2016 was 13.5%, versus -10.8% in 2015.
It has invested over $4 billion in its wind energy segment and generates about 2,300 MW of wind power to over half-a-million residences.
It also acquired Piedmont Natural Gas in 2016, which will help with its growth.
With 19 wind farms across the U.S. and multiple energy revenue streams, it's willing to combine fossil fuels with renewables, which makes it a utility stock to watch.
Eversource Energy (NYSE: ES)
Eversource Energy is a utility company with both electric and natural gas components.
It provides energy to about 37 million people and has a market cap of $18.7 billion.
It has a dividend of 3.2%, and its fourth-quarter report showed operating earnings up more than 26% from the year before.
Its revenue was up 5.1% from 2015, and its electric distribution jumped by 1.9%.
Almost everything improved year over year, and we expect to see Eversource continue to jump.