Best Utility Stocks: My Top 3!


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Last but not least of this Utilities Series! Today, I cover my Top 3 US Utilities. Again, one of the great upside of utilities is the fact they’re mostly recession-proof. No matter what’s going on on the market, everybody needs power and water!

If you missed them, here are the previous posts that are part of this series:

  • What Are Utilities and Why You Should Hold Some
  • Renewable Energy to invest in the future
  • Best Canadian Utilities: My Top 4!

American Water Works (AWK)

Founded in 1886, American Water Works is the largest investor-owned U.S. water and wastewater utility, serving approximately 3.5 million customers in 16 states. It provides water and wastewater services to residential, commercial, and industrial customers and operates predominantly in regulated markets, which account for about 90% of earnings. Its non-regulated market-based businesses provide complimentary water and wastewater services for military bases, municipalities, oil and gas exploration and production companies, and other industrial customers. The company has over 7,000 employees and generates about $3.7B in revenue.

Investment Thesis

The investment thesis in such a company is simple: you are buying shares of a monopoly selling an essential product with repetitive purchases. With a highly fragmented industry and the urgent need for massive investment in water connections, a leader with the size of AWK will find a way to grow its business. The company can grow through both acquisitions and rate improvements. Water needs will continue to increase as the population grows, and there are no substitutes for it. It is also a recession proof business. Finally, AWK is a real money-making machine with constantly increasing cash flow. The only problem about AWK is that you will rarely find it at discount and the stock only offers a ~1.50% yield.

NextEra Energy (NEE)

NextEra Energy’s regulated utility, Florida Power & Light, distributes power to roughly 5 million customers in Florida. Florida Power & Light contributes over 60% of the group’s operating earnings. Gulf Power also operates in Florida. The renewable energy segment generates and sells power throughout the United States and Canada. Consolidated generation capacity totals over 45 gigawatts and includes natural gas, nuclear, wind, and solar assets.

Investment Thesis

NEE makes the bulk of its income from a flourishing state, Florida, through Florida Power & Light (FPL). Therefore, FPL should continue its steady growth. This state shows high allowed returns, fast and convenient regulators, along with low customer rates (lots of potential to hike rates in the future). The company benefits from a territorial monopoly and enjoys an economy of scale. NEE also counts on investments in clean and renewable energy through its wind and solar power plants. Those are the energy of the future and NEE has taken a step forward compared to many of its peers. NEE seems slightly undervalued, but the valuation model will work as long as NEE shows a high single-digit dividend growth rate.

Xcel Energy (XEL)

Xcel Energy manages utilities serving 3.7 million electric customers and 2.1 million natural gas customers in eight states. Its utilities are Northern States Power, which serves customers in Minnesota, North Dakota, South Dakota, Wisconsin, and Michigan; Public Service Company of Colorado; and Southwestern Public Service Company, which serves customers in Texas and New Mexico. It is one of the largest renewable energy providers in the U.S. with 28% of its electricity sales coming from renewable energy in 2019.

Investment Thesis

Utilities and stability could be used as synonyms. Xcel announced an investment of $18.4 billion in capital expenditures from 2017 to 2021. What I like the most about this news is the fact that 19% of it is dedicated to renewable energy. However, this gives additional cash flow to spend on clean energy projects. The Utility enjoys a favorable geographic position as Minnesota and Colorado are among the best wind resources of the U.S. Xcel Energy also estimates that approximately 10% of its rate base will come from renewables by 2021 (4% in 2016). This shift looks promising for growth.

Curious About Vistra Energy (VST)?

In the video below, I’ve covered more details about each of my picks and also review Vistra Energy, which was a demand from one of my YouTube subscriber. While it wouldn’t be part of my Top 3, I was pleased to discover this dividend stock and would definitely keep an eye on it to see how it evolves.

2020 Utilities List With Added Metrics

I’ve used Dividend Stocks Rock resources to pull out the list of all utilities being traded in Canada or in the US. You can play around revenue growth, earnings growth, dividend growth, payout ratios, etc. It should really help you in selecting the best utilities for your portfolio.

Download the List Free Now!

On a final note, remember to always do your own due diligence. Make sure that your next dividend stock fits in your portfolio and review your sector allocation before pressing the buy button.

Sector allocation is key. If you don’t focus on the right sectors, you will not achieve your investing goals. I believe nobody should invest more than 20% of their money in a single sector. The more you add past 20%, the more volatile your portfolio may be.

The key is to hold some of the best companies from each industry sector. Our DSR portfolio models highlight the best of breeds and allow you to make quick modifications to improve yours.

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