Utilities are generally considered safe income investment vehicles. Back in the day, they used to be called widow-and-orphan stocks on Wall Street. That said, there are very different ways you can invest for dividends in the utility sector and some of these stocks now have broader appeal than just the widows and orphans.
Three of the best utility stock options today are Black Hills (BKH -0.73%), NextEra Energy (NEE -0.36%), and Dominion Energy (D 0.41%), but each one is attractive for a very (very!) different reason. Here's what you need to know.
Black Hills is a Dividend King
The Dividend King list is a highly elite group of companies that have increased their dividends annually for at least 50 consecutive years. There aren't a lot of utilities on the list, but Black Hills is one of them. The stock's yield is also a very attractive 4.2% today, which is much higher than the 1.2% yield of the S&P 500 index or the average utility's 2.6%, using Utilities Select Sector SPDR ETF (XLU -0.29%) as an industry proxy. If you like high yields and boring tortoise-like companies, Black Hills is for you.
Black Hills is a fairly traditional regulated utility with operations in electric and natural gas distribution. It serves 1.3 million customers in parts of Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. There is, quite literally, nothing exciting about Black Hills, but that's the reason why it will be attractive to conservative income investors. To be fair, leverage has been a bit elevated lately, but management is working on that, noting that the debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio has been trending lower since peaking in 2022. If you want to add a slow and steadily growing high-yield utility to your portfolio, Black Hills will fit the bill.
NextEra Energy is a dividend growth machine
If you prefer dividend growth stocks, you'll be more interested in NextEra Energy. The company has increased its dividend annually for three decades and the average annualized increase over the past decade was just over 10%. That's huge for a utility, a sector where half that level of growth is considered pretty good (for reference, Black Hills' dividend has increased at around 5% a year over the past 10 years). Even better, management is confident that it can keep increasing the dividend by 10% a year through at least 2026.
The big story here is that NextEra Energy operates two advantaged businesses. The first is its regulated utility operation in Florida, a state that has long benefited from population growth. More customers means more revenues and an easier time justifying rates and capital expenditures to regulators. On top of this core division, NextEra has built one of the world's largest clean energy businesses. That's the growth engine, as solar and wind power increasingly displace dirtier fuel options, like coal. There's a long runway ahead, too, given that the energy transition is likely to be a decades-long affair. The only problem is that NextEra Energy's dividend yield is on the low side, at 2.8%. Still, that's a touch higher than the utility average, so dividend growth investors shouldn't be too upset.
Dominion Energy is working through a revamp
Dominion Energy has the highest yield of this trio at roughly 5%. That's very close to twice the utility average, which should be a warning sign that you need to go in with a bit of caution here. That's because Dominion Energy is working through what has been a very long business overhaul. In truth, it started decades ago when Dominion exited the oil business. But the most recent move was to focus exclusively on electricity operations, which involved selling natural gas utilities to Canada's Enbridge. That step is complete and now Dominion is looking to reduce debt, build a large offshore wind project, and lower the dividend payout ratio so it is in line with peers.
Dominion is making good progress on all fronts, but there's still more work to be done. That said, it is standing behind the current dividend. Note that the last big divestiture, selling midstream assets to Berkshire Hathaway, resulted in a dividend cut.
All in, investors are getting paid well to wait for Dominion Energy to work through yet another business overhaul. But this one is likely to be different because there's really nothing left but the electric utility operations. Once the payout ratio is below 70% or so, investors can realistically expect Dominion to be a boring, slow-growth utility. If you don't mind owning a turnaround play, this high-yielder could be for you.
You have dividend options in the utility sector
Even in an industry considered boring and even sleepy, there is a lot of variability. When it comes to dividend stocks and utilities you actually have a lot of very different choices to consider right now. Black Hills offers an attractive yield from a fairly boring Dividend King. NextEra Energy is a solid dividend growth stock with a bright future. And Dominion Energy is a turnaround play that will pay you well to wait for the turnaround to play out.
