Utility Sector Stocks

The Best Utility Stocks To Buy In 2023

This article will share my list of the top utility stocks in the market. The utility sector is my favorite sector to cover on the sector watch lists because utility stocks offer an attractive mix of predictable and reliable earnings growth. They also have defined shareholder return policies that spell out dividend growth expectations and targeted dividend payout ratios.

These factors make the utility sector ideal for income investors and make forecasting dividend growth and income easier than for some of the other sectors in the stock market. 

What Is A Utility Stock?

A utility stock is the stock of a company that provides a public utility service to its customers.

This service generally comes in one of three forms: Electricity (generation and distribution), Natural Gas (transportation and distribution), or Water (municipal water and wastewater).

  • Electric Utilities are companies that are involved with the generation, transmission, or distribution of electricity to residential, commercial, or industrial customers.
    • Electricity is generated in many ways, including by: Coal Power Plants, Natural Gas Power Plants, Nuclear Power Plants, Wind Turbines, Photovoltaic (Solar) Hydroelectric (Dams, Tidal), Geothermal, and Bio-Mass.
    • The electricity that is generated is then moved from the power source by transmission power lines and then distributed locally for sale to customers. 
  • Natural Gas Utilities are companies involved in the storage, transportation, and distribution of natural gas to customers.
    • Natural gas is produced by oil & gas drilling, processed and carried by midstream companies, and delivered by utilities to local users.
  • Water Utilities are companies that treat water for potable use and distribute that water to customers. I have created a separate spreadsheet dedicated strictly to water utilities.

This article will focus on utilities that operate in the gas and electric utility businesses.

Why Are Utility Stocks Such Great Investments?

Utilities are unique in three ways that make them steadier investments than other sectors of the market.

1. Utilities Are Natural Monopolies

While most businesses operate in competition with other companies, utilities are typically the sole provider of their product in the market they serve. This is not only allowed in the US but is actually written into US law.

I covered this in an article Regulated Utilities: The Market’s Legal ‘Monopoly’, with this section describing the reasoning behind it:

In the United States, utilities are considered a natural monopoly: it would deeply inefficient to have two power lines running to your house, three different gas lines, and four different water pipes competing for your business. So in a series of court cases at the turn of and during the first half of the 20th century, most notably Munn vs. Illinois in 1876, the Minnesota rate cases in 1890, and Hope Natural Gas vs. the Federal Power Commission in 1944, the US Supreme Court found that in return for utilities accepting an obligation to provide safe and reliable service, governments should promise to approve and allow rates that allow the utility to the opportunity to earn a “just and reasonable” return on the “prudent and useful investments” it incurs to meet that obligation. The utility uses its shareholder’s money to keep our power, gas, and water service safe and reliable, and in return the government is required to ensure an adequate return. This is known as the regulatory compact.

With a monopoly in the market it serves, a utility can build out its distribution network without fear of having its customers stolen by a competitor. Not only does this help protect its current business, but it also helps in planning for future growth.

2. Utility Rates Are Protected By Government Law

Not only does the government allow utilities to operate as monopolies, but they also guarantee the rates utilities charge to customers. This was established through a court case over one hundred years ago:

In Smythe vs. Ames in 1898, the Supreme Court assigned the role of determining what constitutes “just and reasonable” to independent state commissions.

Here’s how this works today: Let’s say a utility determines that it needs to spend $1 million to replace the gas pipes in your neighborhood. It petitions approval to the local State utility Commission, typically headed by a 5 member bipartisan Board appointed by the Governor to five-year terms that immunize from short term political considerations.

If the commission finds that that $1 million is “prudent and useful” it then determines how the utility should pay for it, and what return on this investment is “just and reasonable” to both the ratepayer AND the utility’s OWNERS– again, this is mandated by Federal law.

Typically, Commissions direct utilities to finance 50% of these investments using cash – often times retained earnings in the business – and 50% in debt – often long term corporate bonds. The Commission then determines a reasonable Return on the 50% of the investment that was paid with shareholder cash, known as an allowed Return on Equity. This is customarily about 10%. So on a $1m investment paid half with shareholder cash, the utility is given the ability to increase its annual bottom line net income by $50k.

The commission then reviews all of the utilities costs for things like labor, benefits, insurance, maintenance, taxes, interest in the debt that was borrowed, and grosses up all of these ongoing expenses the utility will incur, to arrive at a revenue number the utility will need to achieve to earn that $50k bottom line result, each and every year going forward. This is known as a cost of service approach to ratemaking.

In this example, grossing up all the expenses might equate to an allowed revenue increase of $150k. The Commission then divides this money due to the utility by the number of customers it serves, and each customer’s usage to determine the new, higher per kilowatt, or gallon, or dekatherm rate the utility can charge you, rate increases that are protected by Federal law. This system is why utility earnings have historically been reliable in good times and bad.

With a monopoly in the market, and rates guaranteed by law, well-run utilities are able to provide consistent growth in earnings, which translates to consistent dividend growth as well.

3. Utility Earnings Are Recession Resistant

The final point that makes utilities excellent long-term investments is the fact that in both good times and bad, people make paying the electric bill a priority.

This can be seen on the long-term FAST Graph for WEC Energy Group $WEC, which has grown EPS in each of the last fifteen years, and grew earnings by 7% and 6% during the two years of the “Great Recession”.

WEC 15YR FAST Graph
WEC Energy 15YR FAST Graph

These three factors: Market Monopoly, Guaranteed Rates, and Recession Resistance, are what make utilities the best “widow and orphan” type stocks for a portfolio. They generally have lower volatility than other types of businesses, and the earnings consistency allows for higher payout ratios, making them an attractive investment option for income-seeking investors. 

Low Growth, But Market-Beating Returns

An example of this is the popular utility stock Consolidated Edison $ED, which is a gas & electric utility located in the northeastern United States.

Consolidated Edison is a Dividend Champion (list found here), with a 49-year streak of increasing dividends. As you can see from the FAST Graph, the company is a slow grower, with just 1.9% annualized EPS growth over the last 20 years.

ED 20YR FAST Graph
Consolidated Edison: 20YR FAST Graph

One would think that this slow growth rate would lead to underperformance compared to the market, but with dividend reinvestment, Con-Ed beat the returns of the S&P 500.

Consolidated Edison: 20YR Total Returns
Consolidated Edison: 20YR Total Returns

Over those 20 years, Con-Ed returned 9.8%, compared with just 6.1% from the market. This was the result of effective dividend reinvestment, which more than doubled the share count over time.

Even more impressive is the income produced by the stock, as Consolidated Edison produced nearly $25,000 in dividend income (with dividends reinvested) compared with just over $4,600 from the S&P.

Utilities generally aren’t going to get you ‘rich quick’, but for the patient investor, they can be excellent stocks to hold long-term in a portfolio.

Dividend Income & Total Return Projections

As part of my ongoing research on the utilities, I maintain a watch list of what I consider the thirty best dividend growth stocks in the sector, which are listed below. I’ve also included links to the investor relations page for each company for those interested in more info on them.

This utility watch list spreadsheet includes information about the length of dividend growth streaks, S&P credit rating, 52-week highs and lows, current yield, historical dividend growth rates, analyst EPS and growth estimates, my dividend growth projections, current PE, relative valuation, company guidance for dividend payout ratios, and estimated yield on cost and total return projections for each company.

 I have collected this information from a variety of sources, including Seeking Alpha, FAST Graphs, the Dividend Champions spreadsheet, and the investor websites of the different companies shown.

Top Utility Stock Watch List

This watch list was updated with new information as of March 25, 2023. Keep in mind that the information contained in the document is subject to change and is not updated unless otherwise noted.

Also, know that I am sharing this spreadsheet with readers for informational purposes only and this list is not intended as a buy recommendation for any of the companies mentioned.

Here is the link for a PDF of the spreadsheet.

My hope is that this document proves useful to those looking for investment ideas from the sector, and I encourage people to bookmark this page for future reference.

Another excellent resource on the utility sector can be found at the Edison Electric Institute EEI website, which is the association representing all U.S. investor-owned electric companies. This site publishes quarterly rate reviews and stock performance summaries on the utility sector.

Utility Sector Articles

My previous coverage of the utility sector includes several articles highlighting my picks for the best dividend growth utilities in the market. Here are some of the articles I have written on Seeking Alpha covering the industry:

March 20, 2023

Utilities Have Corrected, But Is XLU A Buy?

March 20, 2020

Top 10 Utility Stocks For Dividend Growth And Income

May 6, 2018

Top 10 Utility Stocks For Dividend Growth And Income

December 30, 2016

2017’s Top Ten Utility Stocks For Dividend Growth And Income

May 2, 2016:

Buyer Beware! My Top Income Stocks In An Expensive Utility Sector

December 21, 2015:

The Top 10 Utility Stocks For 2016 And Beyond

June 17, 2015:

Top 10 Utilities For Dividend Growth And Income

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