6 Favorite Utility Stocks for Safety, Growth & Income

With markets rebounding strongly in recent months, investors have increasingly focused on high-growth names. Nevertheless, several contributors to MoneyShow.com are taking a contrarian view, suggesting that now may in fact be the time to consider more defensive areas such as utilities. Mike Larson, Safe Money Report Our investing approach -- which focuses on higher-rated, higher-yielding, defensively positioned, more-conservative stocks -- is tailor-made for this market. It's also why the stocks in Bedrock Income Portfolio are defensive, relatively highly rated names like NextEra Energy , our latest recommendation. Formerly known as FPL Group, NextEra is the dominant electric utility provider here in Florida. It serves more than 5.5 million customers throughout the state via regulated utility operations. It's also expanding the NextEra Energy Resources division that builds, owns and operates wind and solar generation projects in four states. Adjusted earnings totaled $718 million, or $1.49 per share, in the fourth quarter of 2018. That was up almost 22% from $590 million, or $1.24 per share, in the year-earlier period. Operating revenue climbed 9.8% to $4.39 billion from $4 billion. NextEra is also continuing to expand prudently in its home region and in other parts of the U.S. In the fourth quarter, the company completed or announced acquisitions of the Vero Beach, Fla., municipal utility; a high-voltage transmission system that delivers power to San Francisco; and the Gulf Power generation facilities. NextEra is as Steady Eddie a stock as they come. It has maintained a buy rating from our Weiss Ratings system for several years. It pays a quarterly dividend of $1.25 per share currently, good for an indicated yield of 2.6%. It has raised that dividend at an annual rate of more than 11% for the past half-decade. Go ahead and add this to your Bedrock model portfolio. Richard Moroney, Dow Theory Forecasts Investors treat utilities different than they do other stocks. While such divergence is understandable, it can at times blind us to important truths. Most investors who target utilities do it in search of income, rather than because of their growth, valuation, or other intrinsic qualities. Reflective of this one-track approach, too many investors buy just one or two utilities, rather than diversifying within the sector. As such, we created the Top 15 Utilities portfolio, a diversified basket of 15 stocks designed to offer a yield comparable to that of the average utility with superior price-return potential. Since the start of 2007, that strategy has paid off, as our Top 15 Utilities have returned 266.3% including dividends, versus 160.5% for the S&P 1500 Utility Sector Index. Here's a look at three of those stocks. Alliant Energy provides electricity to 965,000 customers and natural gas to 415,000 customers, all in the Midwest. The company also operates two power plants and owns stakes in some non-regulated transportation businesses. Alliant has grown per share profits at least 10% in each of the last two calendar years. The consensus projects profit growth of 4% this year, a number Alliant seems capable of exceeding, given recent approval for a hike in natural gas rates and cost controls at its two largest subsidiaries. In the wake of a 6% dividend increase in January, Alliant yields 3.1%. The stock earns an Overall rank of 56 (out of 100) on our quantitative ranking system, well above average for a utility, and scores above 70 in both of our sector-specific metrics. The Overall score of 65 out of 100 at DTE Energy is the best among our Top 15 Utilities. The company serves 2.2 million electric customers and 1.3 million gas customers in southeastern Michigan, including Detroit. DTE Energy's sales have risen in 10 straight quarters, never gaining less than 9% during that stretch. Analysts expect both sales and profits to decline this year from weather-boosted 2018 results. With several rate cases outstanding and decent growth of the customer base, we see upside to the consensus. The stock yields 3.1%. American Electric Power operates 10 utility companies serving 5.4 million electricity customers from Texas to Michigan to West Virginia. The company also owns power plants that provide 12% of its revenue. A series of rate hikes last year, coupled with pending rate cases in multiple markets, give us confidence that American Electric Power can exceed consensus expectations for profit growth of 4% this year and 7% next year. The dividend has risen in nine consecutive years and now equates to a yield of 3.2%. Gordon Pape, Internet Wealth Builder Fortis is an electricity and natural gas distribution utility based in Canada. It has total assets of about C$50 billion. The corporation's 8,800 employees serve utility customers in five Canadian provinces, nine U.S. states, and three Caribbean countries. Utility stocks have staged a strong comeback. These stocks are interest sensitive and the prospect of continued rate increases was dragging them down. The company's fourth-quarter and year-end results were solid. For the fourth quarter of 2018, net earnings attributable to common shareholders were C$261 million (C$0.61 per share), compared to C$134 million (C$0.32 per share) for the same period in 2017. For the full year, net earnings were C$1.1 billion (C$2.59 per share) compared to C$963 million (C$2.32 per share) in 2017. The increase in annual earnings was driven by growth in both the regulated and non-regulated businesses, as well as a lower income tax expense, primarily related to U.S. tax reform. These increases were partially offset by a number of other distinct items recognized in 2017, including unrealized mark-to-market derivative gains, an acquisition break fee, an unrealized foreign exchange gain on an affiliate loan, and transmission refunds. On an adjusted basis, net earnings for 2018 were about C$1.1 billion (C$2.51 per share), an increase of C$0.04 per share compared to 2017. In January, Fortis announced that it is selling its 51% interest in the Waneta Expansion Hydroelectric Project in British Columbia to Columbia Power Corporation and Columbia Basin Trust. The price is C$1 billion. The buyers are owned by the Government of British Columbia, are the corporation's partners, and together currently own 49% of the Waneta Expansion. Fortis expects the transaction to close in the second quarter following the satisfaction of customary closing conditions. With its partners, the company constructed the 335-MW hydroelectric generating facility ahead of time and on budget and, through FortisBC Electric, has operated the facility since it went into production in 2015. FortisBC Electric will continue to operate the Waneta Expansion facility and purchase its surplus capacity. We have executed a significant part of our capital funding strategy by selling our interest in the Waneta Expansion, said CEO Barry Perry. The proceeds will help finance the substantial growth occurring in our regulated utility businesses, including growth in British Columbia. The sale of Waneta completes the asset sale portion of our funding strategy. The stock pays a quarterly dividend of C$0.45 per share (C$1.80 per year) to yield 3.6% at the current price. The company is targeting annual dividend growth of 6% through 2023. Fortis is an excellent choice for long-term conservative investors. Chuck Carlson, DRIP Investor The market's recent bout of volatility is helping to fuel gains in utility stocks. Another factor helping the group is the dovish turn taken by the Federal Reserve Board. Utilities tend to be sensitive to interest rates, so the likelihood of flat to lower rates is good news for the group. While it is a challenge to argue that utilities are cheap right now, select utilities continue to offer worthwhile appeal. One solid play in the sector is Southwest Gas , which offers a direct-purchase plan whereby any investor may buy the first share and every share directly from the company. Southwest Gas provides natural gas utility services to more than two million customers in Arizona, Nevada, and California. The company also owns an interstate pipeline system that extends from the Idaho-Nevada border to the California-Nevada border. The firm's Centuri Construction Group provides construction services to the utilities, energy, and industrial markets. One of the appeals of the company is the growth potential of its service region. Indeed, Southwest Gas added 32,000 net new natural gas customers in 2018. Results in 2018 also benefited from record revenue and net income at its Centuri utility infrastructure services segment. Based on the solid 2018 and expectations for the future, the firm expects earnings of $3.75 to $4.00 per share in 2019. The company has beaten consensus earnings estimates in each of the last four quarters. The firm has boosted its dividend every year for more than a decade and should boost the dividend at least 4% in 2019. Yielding 2.6%, Southwest Gas may not have quite the yield of some other utilities. But I like the company's growth prospects relative to its peers and view these shares as one of the better plays among natural-gas utilities.

6 Favorite Utility Stocks for Safety, Growth & Income

Now may in fact be the time to consider more defensive areas such as utilities.

Columnist Conversation

This Weekend on Real Money

Friday Morning Fibocall for 10/23/2020

Let's Talk About Why Cash Is King

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.