US Utilities Sector Shines Amid Market Turbulence

In a year defined by market volatility, the US utilities sector has emerged as a standout performer, buoyed by its defensive nature and attractive dividend yields. The Morningstar US Utilities Index has surged over 10% year-to-date, outpacing the nearly flat performance of the broader S&P 500 index.

Investors are flocking to this segment for its stable cash flows and predictable earnings, especially as households and businesses continue to rely on essential services like electricity, water, and gas.

Key Drivers Behind the Sector’s Growth

• Artificial Intelligence and Rising Power Demand: Although power demand in the US had remained stagnant for years, the burgeoning energy requirements of high-consuming data centers, which support artificial intelligence, are set to disrupt the status quo significantly. BloombergNEF predicts that US data center electricity demand could double to 78 gigawatts by 2035.
• Accelerated Energy Transition: The rapid adoption of electric vehicles and industrial electrification, combined with a shift away from fossil fuels, is expected to further boost power consumption. Large-scale clean energy transformations are already underway, and early movers in this field stand to benefit substantially.
• Role of Natural Gas: As coal-fired power generation declines, natural gas remains a critical “bridge fuel” for several decades. It continues to play an indispensable role in transitioning towards cleaner energy sources.
• Rigid Demand for Water Resources: Ongoing population growth and urbanization are driving the demand for water, even as climate change intensifies concerns about supply stability.

These factors are not only prompting significant investments in utilities infrastructure, but also encourage projects that recover costs and deliver profits through gradual rate hikes post-completion. Given that utilities are typically subject to government regulation, companies in this sector often benefit from stable and predictable revenues.

Notably, investments in power generation, distribution, and transmission have already seen a year-on-year increase in 2024 compared to 2023, bolstered by efforts to support data center construction, electrification, and the re-shoring of manufacturing.

Rising Treasury yields could pose a risk to the allure of utilities stocks, as higher rates sometimes diminish the relative attractiveness of high-dividend sectors. However, market pricing appears to have absorbed this risk, and prospective interest rate cuts later this year are anticipated to benefit the sector even further.

Top 5 Recommended US Utilities Stocks

Morningstar has highlighted five high-quality utilities stocks that offer attractive dividend yields:

NextEra Energy Inc. (NEE)

• Dividend Yield: 3.3%
• Overview: NextEra Energy operates a regulated electric generation, transmission, distribution, and retail electricity business in Florida and has expanded into renewable energy with wind and solar projects. The company is also investing in green hydrogen, battery storage, and nuclear power. Its Florida subsidiary’s rate case forecast for 2026-2029 could deliver an impressive 11.9% return, with an industry-leading 11% capital return. NextEra has increased its dividend for 31 consecutive years.

Duke Energy Corp. (DUK)

• Dividend Yield: 3.6%
• Overview: Duke Energy supplies over 8 million customers across five states, including key markets in the Carolinas and Florida, and supports over a million natural gas customers in states such as Tennessee and the Carolinas. As one of the country’s largest nuclear operators, Duke stands to gain in a decarbonizing economy. Its guidance suggests profit growth reaching the upper range of its 5%-7% target, and it has raised dividends for 20 consecutive years.

Eversource Energy (ES)

• Dividend Yield: 4.7%
• Overview: Serving over 4 million customers in Massachusetts and other New England states, Eversource Energy is well-positioned, given its low valuation and favorable regulatory environment. Recent regulatory approval for over $1 billion in deferred cost recovery is likely to boost its credit indicators. While the company may not significantly benefit from the data center surge, robust investment prospects are expected to support earnings growth of around 6% annually through 2028. The company has raised dividends for two consecutive years.

Dominion Energy Inc. (D)

• Dividend Yield: 4.8%
• Overview: Dominion Energy supplies electricity to more than 3 million households and businesses across Virginia and the Carolinas, and delivers gas to an additional 500,000 customers in South Carolina. Alongside its strong nuclear portfolio, Dominion is expanding its footprint in solar and offshore wind projects. Its strategic pivot toward renewable energy has garnered it an attractive profit margin of nearly 5%.

Southern Co. (SO)

• Dividend Yield: 3.3%
• Overview: Southern Company’s diverse operations include electricity and gas distribution, wholesale energy, distributed solutions, and even fiber wireless communications. Its strong performance in the southeastern US, particularly in Georgia, is bolstered by favorable regulatory conditions and economic growth. Management is considering an upward revision of a substantial $63 billion five-year investment plan, reinforcing the company’s commitment to long-term value creation. Southern Co. has increased its dividend for 25 consecutive years.

Summary

The US utilities sector’s defensive qualities, coupled with compelling growth drivers, have positioned it as a key beneficiary amid current market turbulence. Strategic investments in renewable energy, infrastructure upgrades, and adaptation to evolving technology are supporting robust long-term growth. With a robust dividend record across major players, investors can find both safety and attractive returns in this sector.

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