Utilities have stomped on the accelerator over the past year. A good barometer for the sector's surge is the rise in The Utilities Select Sector SPDR ETF , which is up 21% over the past 12 months. Several factors have helped power utility stocks, including the prospect of lower interest rates and the acceleration of power demand from catalysts like AI data centers.
Despite that power surge, several utility stocks still look like attractive investments these days, especially for those seeking a high-yielding dividend. Black Hills Corporation (NYSE: BKH) , Duke Energy (NYSE: DUK) , and Xcel Energ y (NASDAQ: XEL) stand out to a few Fool.com contributors for their above-average dividends. Here's why they believe these utilities are some of the best in the sector to buy right now.
Black Hills is hard to beat on the dividend front
Reuben Gregg Brewer (Black Hills Corporation): When it comes to utilities, most investors probably won't know the name Black Hills. That makes sense, given its modest $4 billion market cap . However, this tiny electric and natural gas utility has achieved something that few other utilities have: It has increased its dividend annually for over five decades. That makes Black Hills a highly elite Dividend King . You don't build a dividend record like that by accident.
Black Hills serves 1.3 million customers across parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. Customer growth in its regions is expanding at nearly three times the rate of U.S. population growth. That's good. However, the company has higher leverage than many of its peers, which was a negative while interest rates were on the rise. That caused the company's stock to fall, and it pushed the dividend yield toward the high end of the recent yield range. The roughly 4.4% yield is still historically attractive, even after a stock rally, driven by expectations that interest rates will fall.
BKH data by YCharts
But what is the future likely to hold from here? Management is projecting earnings growth of between 4% and 6% a year through 2028, driven by a five-year capital investment plan worth around $4.3 billion. The dividend is likely to grow along with earnings, over time. So you get a relatively high dividend yield -- the average utility yields 3% -- along with a reasonable dividend growth rate and a Dividend King utility with a growing business. That should be quite an attractive combination to most conservative dividend investors .
This utility's growth plans should mean bigger dividends
Neha Chamaria (Duke Energy): Duke Energy's dividend yield of 3.6% isn't among the highest in the utility sector, but the stock has been one of the top performers in recent years, more so when dividends are taken into account. In just the past 10 years, for example, investors who owned Duke Energy stock and reinvested dividends all along have more than doubled their money. Duke Energy has a simple strategy: Keep upgrading and expanding its infrastructure to win regulators' approvals for rate base hikes at regular intervals and use all of that cash flow to reinvest further and reward shareholders. So far, Duke Energy hasn't disappointed its shareholders, and it's unlikely it will.
DUK data by YCharts
Duke Energy plans to invest $73 billion between 2024 and 2028 to upgrade its 300,000 miles of power lines, build new power generation capacity, and modernize its natural gas distribution network. The company believes that capital spending should boost its adjusted earnings per share by 5% to 7% annually through 2028 and allow it to pay bigger dividends year after year.
To be fair, Duke Energy's pace of dividend growth hasn't been all that great, but as long as any dividend growth is backed by higher earnings and cash flows, it should propel the stock price in the long term. We've already seen that happen with Duke Energy shares.
Duke Energy's dividends also look safe and reliable, for two reasons. First, the company is one of the largest utilities in the U.S. and operates in some of the fastest-growing states, such as Florida and the Carolinas. That also means there's strong potential to expand its customer base. Second, Duke Energy is targeting a dividend payout ratio of 60% to 70%, which means the company will always have some money to pay debt and fund growth, even during challenging times. With management already securing future growth with its $73 billion capital spending plan, it's never too late to buy and hold this utility stock .
Powerful total return potential
Matt DiLallo (Xcel Energy): Xcel Energy's stock has surged more than 25% over the past six months. However, the electric and gas utility is still an attractive investment these days. Even with that power surge, it trades at about 17.5 times its forward earnings . That's well below the forward earnings of roughly 20 that most of its utility peers fetch these days. It's also much cheaper than the S&P 500 's 23.5 times forward earnings.
The company's relatively more attractive valuation is why it offers a higher 3.5% dividend yield, more than double the S&P 500's sub-1.5% yield. Xcel Energy has increased its payout for 21 straight years. It has grown its dividend at a more than 6% compound annual rate over the last decade .
Xcel Energy should have plenty of power to continue growing its dividend in the future. The company , which operates four electric and gas utilities across eight Western and Midwestern states , expects to invest at least $39 billion over the next five years in maintaining and expanding its operations. Meanwhile, it sees the potential to invest an incremental $5 billion over that period to support rising power demand. This forecast drives its view that it can grow its earnings per share by 5% to 7% annually.
The utility believes it could grow its dividend at a similar rate, given its reasonable payout ratio of 50% to 60% of its stable earnings. Add its current yield to its earnings growth rate, and Xcel Energy could generate total annual shareholder returns in the 9% to 11% range. There's upside to that if the company's valuation rises closer to that of its utility sector peers. That's a solid return from such a low-risk, high-yield dividend stock.
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Matt DiLallo has no position in any of the stocks mentioned. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has positions in Black Hills. The Motley Fool recommends Duke Energy. The Motley Fool has a disclosure policy .
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